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Daily Newsletter, Tuesday, 06/17/2003

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The Option Investor Newsletter                 Tuesday 06-17-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Is That It?
Futures Markets: Stopping to smell the ...tulips?
Index Trader Wrap: (See Note)
Market Sentiment: Pause at the highs
Weekly Fund Screen: Highest Returns Since Inception


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      06-17-2003           High     Low     Volume Advance/Decline
DJIA     9323.02 +  4.10  9352.77  9268.96 1.85 bln   1487/1733
NASDAQ   1668.55 +  2.00  1674.09  1656.57 1.99 bln   1740/1581
S&P 100   510.56 +  1.23   512.67   508.38   Totals   3227/3314
S&P 500  1011.68 +  0.94  1015.33  1007.04 
W5000    9662.64 +  8.80  9692.91  9617.95
RUS 2000  458.00 +  0.53   458.49   455.14 
DJ TRANS 2482.57 - 12.90  2498.85  2467.45   
VIX        21.77 -  0.47    23.37    21.48   
VXN        33.61 -  0.18    34.71    33.52 
Total Volume 4,111M
Total UpVol  2,312M
Total DnVol  1,684M
52wk Highs  907
52wk Lows    15
TRIN       0.72
PUT/CALL   0.59
************************************************************

Is That It?

After a +200 point gain the bears could only manage a -50 point
sell off at the lows of the day and the markets finished in the 
green. This lack of shorting conviction at new highs for the year
is proving that the bears have abandoned the fight and may be 
getting sleepy after several months without any rest. Don't start
counting those Dow 10,000 chickens just yet. The race is only half
over. 

Dow Charts - 240/weekly



Nasdaq Chart - Daily



The bad news bulls were thrown an economic setback this morning
when economic reports suggested that deflation was less a threat
than previously thought. The Consumer Price Index came in flat
instead of falling slightly as expected. After falling -0.3% in
April the index surprised analysts with the recovery. Core 
inflation actually rose +0.3% but was offset by drops in energy. 
This one report has thrown Fed prediction theory into turmoil. 
This was the largest jump in core inflation in over a year. We
thought the inflation monster was dead and his evil twin was 
about to appear in our midst. Surprise, surprise. Is this a
reversal of the trend or just a blip on the down slope? Inquiring
minds want to know. 

Adding to the Fed's problem was the Industrial Production which
also rose more than estimates at +0.1%. These numbers may not 
seem like much to the casual observer but it is the reversal 
of the trend that is causing raised eyebrows. The economy may 
actually be recovering instead of falling into the deflation 
quicksand. The final chapters have not yet been written as 
Capacity Utilization remained at a 20 year low. It appears the 
end of the war did provide a very slight bounce in the economy 
but the problem for the Fed is one of indecision. Is it a blip
or a reversal?

The problem for traders is one of demand. Despite the better 
than expected CPI and IP/CU there has not been any pickup in 
demand. Manufacturers are ramping up (or ramped up) production 
in expectation of a new demand wave once the war was over. That 
demand wave has failed to appear anywhere but in the home market. 
Retail Sales came in at +0.3%, which reversed last week's losses
but is still continuing the downward trend. Part of the lack of
demand is still the rising unemployment which according to John 
Snow today could continue to rise to 6.2% to 6.3% before it gets
better. Sales are stable but not improving, yet. All indications 
are the consumer will get one more round of refinance cash and 
that could power the next retail bounce. 

John Snow said the employment picture remained bleak for the short
term but he expected it to get better WHEN the economic recovery 
appeared. According to the Manpower Employment Outlook Survey
released today the index fell to 11 for the 3Q compared to 13 for
the 2Q. This means employers are expecting to hire less workers
for the 3Q than they did in the 2Q. 50% of the employers surveyed
said they would hire fewer workers for the seasonal 3Q production
cycle than normal. Survey critics claim it was taken during the
height of the war and SARS outbreak. 

Despite the unemployment numbers the homebuilders are going for
the gold. Housing Starts soared to an annual rate of 1.73 million
and recovered entirely from the April drop. The obvious reason is
the lowered interest rates and the assumption the Fed is going to
cut rates again next week. That assumption took a serious hit 
today. 

With the NY Empire Survey on Monday and the CPI/IP today the Fed's
fears of deflation may be groundless. At least that is the short 
term theory that played out in the stock/bond markets today. The
Fed fund futures WERE showing a 62% chance of a 50-point cut next
week. After today's reports those odds fell to only a 38% chance. 
The balance of risk wavered for those expecting lower rates ahead. 
For the second consecutive day bonds sold off and yields rose
sharply. 

Ten Year Treasury Note Yields - 60 min


 
The markets are now faced with a problem. Traders have been looking
for a 50 point cut based on the prior comments of Fed heads and
the negative economics from several weeks ago. The economics appear
to have turned and the Fed may only cut 25 points. Traders are now
confused. Do they sell the decrease in potential for a rate cut or
do they buy the potential for an improving economy. Wait a minute, 
they have been buying the potential for an economic improvement 
over the last three months. The news this week should have been 
confirmation of that hope. Do you buy the news or the rumor? If 
you have been buying the rumor all along then "normal" trader
reaction is to sell the news. Confused?

It is only going to get worse. The constant tirade of "buy now"
comments from the talking heads has turned to a "take some off
the table" plea instead. Most traders did not follow their comments
on the way up and it is doubtful they will have much impact on
the flip side. 

I think the next three weeks are going to be very volatile. For 
those that need more vivid word pictures that means we are in for
some major swings and you know what happens in a swing. There are
ups and downs. According to most knowledgeable analysts there are 
quite a few funds that are still under invested. They, like 47%
of traders according to a CNBC poll, thought this bounce was just
a bear market rally that would fail. Now they are faced with an
end of quarter and end of half with cash on their books. Half of
their year is already over and they are under performing their 
peers. It is time to spend that cash and dress up those statements
with numerous commentators calling for Dow 9500-10,000 soon. It
does not matter that those numbers may not be hit in June because
it is the publics perception of the market that counts. Reality
is irrelevant. According to another survey 35% of funds were
overweight in techs despite thinking they were overvalued. 66% 
of fund managers think the market is overbought. 

This is also a quadruple expiration week. Equity Options, Index
Options, Index Futures and Single Stock Futures. Tack on a critical
Fed meeting next Tuesday, the end of quarter and half and a market
that has stretched overbought to multiple decade extremes and the
fireworks are about to start. Add in a bleeding bond market at
45 year highs and the potential for excitement is off the scale. 

According to Art Cashin tonight the professional traders are 
planning to be short come month end to capitalize on the remaining
funds getting long for the quarter and then dumping in July. 
The professionals are expecting dips to be bought for the rest 
of the week as the remaining funds race to dress up their 
statements. Hedge funds that have been playing both sides of the
market will be forced to cover shorts going into the month end
for the same reason. Market makers who took the other side when
traders bought puts over the last month had to short stocks to 
cover the puts they sold. Those positions will have to be 
squared and that stock bought back.   

The volume today was very deceptive. All day long it appeared the
volume was going to be very light but a surge in the last hour
pushed it over four billion across all markets. Both the NYSE and
Nasdaq came very close to two billion shares on a LIGHT day. The
markets SHOULD have sold off today after the very strong Monday. 
They didn't. Bulls were unable to push the Dow over 9350 but bears
were unable produce a loss. Every dip was bought in volume. In the
Futures monitor we watch contract volume at strikes away from the
current price and there was a large and constant bid just under 
the current range. If you look at the volume in individual issues
it is clearly institutional. They are holding their nose and 
hoping for a dip to buy. 

The only economic report of importance on Wednesday is the 
Monthly Mass Layoff report. This could see an upside surprise if 
the trend from the Challenger Report follows through. This would 
put more pressure on the Fed and the bond market and theoretically
supply more cash for equities. I know, it does not make sense. 
I just told you the stock market was overvalued and due for a 
correction the first week of July and now I am saying bond 
junkies may sell and put the money in stocks.  I did not say it 
would all happen tomorrow. The pivotal day is June-25th and the 
Fed announcement. Everything will revolve around that. Funds may 
want to hold off on buys until after the meeting in hopes of a
market drop on the announcement. Conversely, they may want to 
buy now in hopes of a larger than expected cut. Between now and 
July 1st the markets will become more and more volatile as 
traders jockey for position. Everybody has a different agenda 
and a different calendar but all will reach critical mass by 
June-30th.    

Compounding this problem was the Semiconductor Book-to-Bill report
tonight which showed a drop in orders and shipments for May. This 
was the third consecutive monthly drop and could actually be good 
news for the bulls. It shows that the market has not recovered and 
is still weak and actually helps the case for another rate cut. It
is simply a monstrous chess game. Every report can be looked at 
in several different ways by the bulls and the bears. Each move,
however insignificant it seems, will eventually impact some other
event later in the game. Institutional traders try to analyze the
hundreds of events past, present and future to predict the next
market move. The magnitude of possibilities will make your head
spin but it happens every day. When you have billions at risk you
have to analyze the potential outcomes for days and weeks ahead. 
Retail traders simply go with the flow like legions of pawns each
striking their individual blow for the common cause.  

For the next two weeks the magnitude of inflection points for the
market are off the scale. We are grossly overbought and at new
52-week highs after posting massive gains from the Oct/Mar lows. 
We are entering the July earnings season where 824 companies (as
of Monday) have already issued guidance. 422 of those companies
have warned compared to 211 that raised estimates. Anything is
possible. Did those 422 over warn due to the war, SARS and 
Sarbanes Oxley? Will they surprise to the upside instead? Will
the Fed bluff its hand and stand pat with no change on improving
economics or go for broke and shoot the works with a 50 point cut?
Will the warning season pass uneventful and thereby give the bulls
more confidence to buy the top? Nobody knows but while you are
reading this there are computers somewhere analyzing all these
possibilities. 

My suggestions are to tread softly for the next three weeks. We 
could go either way very fast depending on the news events and
the results of those computer runs. To compound the comments 
above, the first week of July is typically the strongest week 
of the month. The first week of the 3Q and 2H sees an influx of 
retirement money that could overshadow the negativity from the
overbought conditions. According to the Traders Almanac the first
trading day of July has been up 12 of the last 13 years. That 
is a trend that few will want to fight and many will want to 
capitalize on. The 1st is on a Tuesday with Friday the July-4th
holiday. This means many traders will want to be in/out of their
positions on Friday June-27th and take a long holiday until 
July-7th. Now that I have you really confused about what to do
just imagine you had several billion dollars at stake based 
on your trading plan for the next three weeks. Fund managers 
everywhere are facing that decision this week. Those who gambled
in March are sitting on fat profits and well ahead of their 
competition. Do they hold or fold? My bet is a close for a fast
buck once July arrives. Definitely not all their positions but
those with the greatest profit at risk. With conditions heating
up in Syria, Jordan, Iran, Israel and Iraq there is always the
potential for a catastrophic event. Taking some chips off the
table is only prudent.  

As a commentator and spectator this is the kind of setup that 
really excites me. I love to watch the cards as they are dealt
and watch how the big money plays the game. I could easily see
9500 this week and even higher numbers ahead if all the cards 
fell correctly. However, anyone that has ever played poker or any 
other game of chance realizes how seldom the cards fall correctly. 
That brings us back to the volatility comment. This is normally
a very slow period in the markets but this is far from a normal
market. About the only thing we can say for sure is the next
three weeks will involve high volume and high volatility. 
Be careful, there may be fireworks that are not on the 4th. 
   
Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


***************
FUTURES MARKETS
***************

Stopping to smell the ...tulips?
Jonathan Levinson

The equity indices went nowhere today, either consolidating 
yesterday's massive gains for a renewed push to new highs, or 
distributing near the top.  Unfortunately, we won't know which it 
was until today's range gets violated in one direction of the 
other. 


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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U     1021   1015   1010   1005   1000
YM03U     9389   9340   9294   9245   9199
NQ03U     1266   1253   1243   1230   1220


10 minute chart of the US Dollar Index





The US Dollar Index had a very good day, blasting through the 
92.50 s/r zone from below and then finding support at that level 
on a pullback before pushing higher.

Daily chart of August gold


 


The divergence between gold and the dollar continued today, with 
August gold closing higher by 3.90 at 363.60, touching an 
intraday high of 366.  The precious metals indices were also 
higher, holding above significant resistance with XAU adding 
+2.87 to 82.24 and HUI +5.27 to close at its high of the day at 
156.4.  The climb above the 360 resistance level on a fresh buy 
signal from the 10 day stochastic is quite bullish.  The CRB also 
diverged bullishly from the US Dollar Index, adding 1.05 to 
235.50, led by cocoa, copper, gold, soybeans, and heating oil.  
Generally, "hard assets" trade contrary to the dollar, increased 
demand for dollars tends to be at the expense of commodities, and 
vice versa.  Investors and traders don't tend to be buying 
dollars and gold at the same time. 


Daily chart of the ten year note yield


 

Treasuries got sold solidly today, with yields rallying across 
the curve and closing at their highs of the day.  The FVX closed 
higher by 1.1 basis points to 2.221%, the TNX +9.6 bps to 3.266%, 
and the thirty year yield +8.2 bps to 4.303%.

Daily NQ candles


 

NQ futures went nowhere today, but they did so most 
interestingly, closing lower by 5.50 after printing a 23 point 
range.  This displays pure indecision in the market, and with the 
COMPX trading 1.9B shares today, it did so on decent volume, 
setting up either a large consolidation to cheer the bulls or a 
large distribution top for the bears.  The fact that such a 
shallow pullback occurred on the heels of yesterday's big move up 
is certainly bullish, but the failed push higher is not.

30 minute 20 day chart of the NQ


 

Today's action did nothing to alter the setup discussed 
yesterday- only moved it sideways by a day.  The possible reverse 
head and shoulders setup is still in play, and will require a 
either a close below the lower ascending trendline to invalidate 
it or a close above the upper trendline to invoke the upside 
projection of the pattern approximately 55 points above that 
neckline if it fulfills.

2 day 6 minute interval chart of NQ


 

I was fiddling with Fibonacci fans today as seen in the intraday 
chart above.  Zooming in on this 2 day view of the Nasdaq Sept. 
future contract, we see today's narrow ascending range.  It could 
certain feel like a top, particularly with the rounded opening 
failure to hold the new year high this morning.  The bounce off 
the low and gradual climb back higher gave us the narrow close.  
The short cycle stochastics was barely useful during the day, and 
the sideways action muddled the issue going into the close.


Daily ES candles


 

The ES contract was stronger than the NQ, though I observed in 
the market monitor during the session that it was leading to the 
downside as well.  It's odd to see the ES and YM leading the NQ 
for a change.  There's little to add here, other than the 10 day 
oscillators are still in trending territory, more overbought than 
the weaker NQ. 


20 day 30 minute chart of the ES


 

The reverse head and shoulders is bounded by the upper and middle 
ascending trendlines on the 20 day 30 minute chart.  We won't 
know which until either level is taken out.


Daily YM candles


 

Nothing to add for the Dow futures.

20 day 30 minute chart of the YM


 

Today's session was significant on almost every index except for 
equities.  Treasuries confirmed this week's reversal, with the 
yield filling its downside gap and rallying right up to key 
resistance.  Gold confirmed its upside reversal as well, with the 
miners in particular setting new year highs.  The action in the 
US Dollar Index was frankly puzzling, particularly given the 
selling in treasuries and the buying of miners and gold.  I don't 
think of strength in gold or bonds to be fundamentally bullish 
for equities- quite the reverse.  The simultaneous rally in bonds 
and stocks has made sense to me in the context of one giant 
Federal Reserve-sponsored open market operation- an massive 
amount of money was chasing stocks and bonds together. Today, the 
fed drained 6.25B in overnight repos following its massive 10.25B 
infusion yesterday. 

My only conclusion is that an intermarket trend change is in its 
very early stages.  Whether it will ultimately benefit equities 
or not I do not know, and neither, apparently, did the market 
today.  Given the fed's insistence on pursuing a course of 
monetary inflation, I remain bullish on gold and commodities.  I 
am fundamentally bearish on equities, but the question is whether 
this monetary inflation will continue to flood into stocks and 
bonds, or just stocks, or whether it will cease.  I doubt that 
the latter will occur.  Will bonds and stocks selloff together 
after rising together?  Or will money from bonds be reallocated 
into equities as we've seen in the past?  This is the key 
question for equity futures traders.  Hopefully tomorrow will 
bring us closer to an answer. 


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_061703_1.asp


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****************
MARKET SENTIMENT
****************

Pause at the highs

Prior to Aristotle, ancient Greek philosophers argued, among 
other things, as to whether reality and its apparent diversity of 
events was the product of a single force, or of many forces.  
Parmenides argued the former position, which is termed "monism", 
while Heraclitus, a pluralist, believed that reality is comprised 
of an uneasy stasis between opposing forces.
 
That's how the market feels.  Today's session was on moderate 
volume of 1.96B Nasdaq shares and 1.47 NYSE shares, light for the 
NYSE.  Advancing volume nearly double declining volume on the 
Naz, while on the NYSE it was ahead by only 125,000 shares.

The volatility indices dropped fractionally, despite sustained 
put to call readings below .50 for much of the session.  It 
looked like nothing more than overdone bullish call speculation, 
except that the volatility indices held up too well.  There was a 
battle going on, but as the narrow price range across the indices 
showed, there was a very close balance between those opposing 
forces.  The real action today was seen in other markets, such 
precious metals which rallied, and bonds, which sold off.
 
The bullish percents remain at the tops of their ranges.  That's 
not to say that they cannot go higher, but the downside risk far 
outweighs upside potential from current levels.   Unfortunately, 
if this is a real secular bull market getting underway, we'd 
expect to see such extremes in breadth, sentiment, volatility and 
the bullish percents as we've been following throughout this 
rally.
 
In the meantime, it is essential to review the data below with an 
open mind, and to hear what it is trying to day.  Each of the 
technical measures we follow represents a different aspect of the 
market at this time.  Following them day by day will help you to 
"feel" each indicator on an ongoing basis.  No one indication is 
relevant on its own-  its previous readings and the trend it's 
describing is most important.  Taken together, you can develop 
educated guesses for where the market wants to go next.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High:  9574
52-week Low :  7197
Current     :  9323

Moving Averages:
(Simple)

 10-dma: 9132
 50-dma: 8647
200-dma: 8348

S&P 500 ($SPX)

52-week High: 1038
52-week Low :  768
Current     : 1012

Moving Averages:
(Simple)

 10-dma:  993
 50-dma:  934
200-dma:  889

Nasdaq-100 ($NDX)

52-week High: 1266
52-week Low :  795
Current     : 1240

Moving Averages:
(Simple)

 10-dma: 1222
 50-dma: 1138
200-dma: 1029


-----------------------------------------------------------------


By the looks of today's movement in the volatility indices you'd
think the markets had rallied higher again today.  Not so, but 
that does make one suspect what might be happening to the 
underlying psychology of the investor.

CBOE Market Volatility Index (VIX) = 21.77 -0.47
Nasdaq-100 Volatility Index  (VXN) = 33.61 -0.18

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.59        857,214       506,484
Equity Only    1.11        195,030       216,707
OEX            1.18         53,238        62,999
QQQ            1.16         45,289        52,597


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          71.7    + 1     Bull Confirmed
NASDAQ-100    87.0    + 0     Bull Confirmed
Dow Indust.   83.3    + 3     Bull Confirmed
S&P 500       82.1    + 1     Bull Confirmed
S&P 100       81.0    + 2     Bull Confirmed


Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.00
10-Day Arms Index  1.07
21-Day Arms Index  1.17
55-Day Arms Index  1.13


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.

-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1326      1618
Decliners    1538      1490

New Highs     308       244
New Lows        9         3

Up Volume    963M     1213M
Down Vol.    776M      676M

Total Vol.  1782M     1928M

M = millions


-----------------------------------------------------------------


Commitments Of Traders Report: 06/10/03

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

This week brings us an interesting change in the commercials.  
Both the long and short positions jumped by 18K to 20K but the 
amount that the commercials are net long dropped significantly.
Could we be witnessing a precursor to a reversal next week?

Small traders also opened their wallets this week and bought 
plenty of new contracts pushing both long and short positions
to new four-week highs.  The amount that small traders are long
moved strongly ahead, which is closer to the historical norm.
(small traders tend to move counter trend to the commercials,
who tend to be correct when judging trends.)


Commercials   Long      Short      Net     % Of OI
05/20/03      438,238   426,569    11,669     1.3%
05/27/03      435,195   423,474    11,721     1.4%
06/03/03      438,228   422,722    15,506     1.8%
06/10/03      456,967   455,024     1,943     0.2%

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year:   15,506  -   6/3/03

Small Traders Long      Short      Net     % of OI
05/20/03      157,034   154,980     2,054     0.7%
05/27/03      147,687   149,344    (1,657)   (0.6%)
06/03/03      169,650   167,172     2,478     0.7%
06/10/03      199,356   185,403    13,953     3.6%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02


E-MINI S&P 500

Maybe all those full S&P contracts are being hedged here with
the e-minis (we doubt it) but the net short position for
the commercials jumped strongly this week.  Meanwhile, as if
on cue, the small traders grew excessively bullish.  Small
trader long contracts to short contracts is virtually 10 to 1.
If you're a contrarian, that smells like a top.


Commercials   Long      Short      Net     % Of OI 
05/20/03      232,184   468,006   (235,822)  (33.7%)
05/27/03      252,655   485,962   (233,307)  (31.6%)
06/03/03      267,680   512,648   (244,968)  (31.4%)
06/10/03      270,359   543,221   (272,862)  (33.5%)

Most bearish reading of the year: (337,496)  - 04/29/03
Most bullish reading of the year: (222,875)  - 04/01/03

Small Traders Long      Short      Net     % of OI
05/20/03      422,555    62,580   359,975    74.2%
05/27/03      427,412    66,031   361,381    73.3%
06/03/03      470,655    58,420   412,235    77.9%
06/10/03      498,999    49,689   449,310    81.9%

Most bearish reading of the year: 283,831   - 04/08/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

Hmm....commercials bought more short contracts on the 
NDX this week and their net short position almost tripled.
As expected the small trader is thinking exactly the 
opposite with a jump in longs and a decrease in shorts.
This produced a big jump in their net long position.

Again, if you're a contrarian, this looks like symptoms
of a market top.


Commercials   Long      Short      Net     % of OI 
05/20/03       42,864     42,040       824    1.0%
05/27/03       40,999     41,491      (492)  (0.6%)
06/03/03       42,232     43,217      (985)  (1.2%)
06/10/03       42,877     45,793    (2,916)  (3.3%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
05/20/03       11,024     9,965     1,059     5.0%
05/27/03       12,194    13,339   ( 1,145)  ( 4.5%)
06/03/03       11,407     9,092     2,315    11.3%
06/10/03       14,759     7,761     6,998    31.1%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

While we do see a drop in long positions for commercials
and a drop in short positions for small traders (what a 
coincidence), the overall trend here is the same.


Commercials   Long      Short      Net     % of OI
05/20/03       18,028    14,108    3,920      12.2%
05/27/03       18,660    15,537    3,123       9.1%
06/03/03       19,480    15,282    4,198      12.1%
06/10/03       17,368    15,263    2,105       6.5%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
05/20/03        8,378     9,922    (1,544)   ( 8.4%)
05/27/03        8,225     9,316    (1,091)   ( 6.2%)
06/03/03        7,948     9,353    (1,405)   ( 8.1%)
06/10/03        7,968     8,316    (  348)   ( 2.1%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


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******************
WEEKLY FUND SCREEN
******************

Highest Returns Since Inception

These mutual funds have the highest total returns since inception 
and may be appropriate for risk-tolerant investors looking to add 
octane to their portfolio.  With U.S. equity indices posting 2003 
highs, we thought it would be appropriate to focus again on funds 
that have produced superior returns since starting operations and 
would appear to offer strong long-term growth potential.  Many of 
the funds in this week's screen invest primarily in small company 
stocks, which can outpace large-cap stocks over the long run, but 
generally with greater risk. 

Some of the funds on this week's short list are specialized stock 
funds investing in a particular sector, such as biotechnology, or 
in a particular country, such as Russia.  We'll leave them in for 
now but give preference to diversified equity funds, which spread 
assets across multiple market sectors and individual stocks in an 
effort to diversify portfolio risk.  

Below is a summary of the top performing funds on an inception to 
date return basis, using the NYTimes.com Fund Finder available at 
marketwatch.nytimes.com.


 Return Since Inception:
 +68.3% Schroder Ultra Fund Inv (SMCFX)
 +43.1% Morgan Stanley Biotechnology Fund A (BTKAX)
 +39.1% Forum Funds: Brown Advisory Small-Cap Growth A (BIAAX)
 +37.4% Federated Kaufmann Small-Cap Appreciation (FKASX)
 +33.3% Fidelity International Small Cap Fund (FISMX)
 +32.6% Turner Micro Cap Growth Fund (TMCGX)
 +31.9% World Funds: Third Millennium Russia Fund (TMRFX)
 +31.5% Artisan International Value Fund Inv (ARTKX)
 +31.4% Frontegra Horizon Fund (FRHOX)
 +31.4% American Funds: New Economy Fund 529-F (CNGFX)
 +30.6% Metropolitan West High Yield Bond Fund (MWHYX)
 +30.3% T. Rowe Price Mid-Cap Growth Fund R (RRMGX)
 +30.2% PIMCO Funds: NACM Flex-Cap Value Fund D (PNFDX) 

    
Schroder Ultra Fund (SMCFX) seeks maximum capital appreciation by 
investing primarily in the common stocks of companies with market 
caps of below $500 million at time of investment.  Its aggressive 
investments in smaller companies make it riskier than the average 
diversified U.S. stock fund.  Jenny B. Jones has managed the fund 
since December 2002, when star manager Ira Unschuld departed.  It 
is currently closed to new investors.  Turner Micro Cap Growth is 
closed as well.

Morgan Stanley Biotechnology Fund A Class (BTKAX) seeks long-term 
capital growth by investing at least 80% of fund assets in equity 
securities of biotech companies worldwide.  It will celebrate its 
first anniversary on July 25.  At March 31, pharmaceutical giant, 
Amgen Inc. represented 11.8% of total assets.

Forum Funds: Brown Advisory Small-Cap Growth Fund A Class (BIAAX) 
seeks capital appreciation by investing primarily in the stock of 
companies that have exhibited above-average earnings increases in 
the past few years and have strong sustainable earnings prospects 
along with an attractive stock price at time of investment.  This 
team managed small-cap growth fund seeks to "buy early" and hold.

The other funds on the list have similar growth styles whether it 
is applied to large-caps, mid-caps or small-cap stocks.  American 
Funds: New Economy Fund (CNGFX) focuses on service-oriented firms 
and is team managed by Capital Research & Management Company, one 
of the world's best money managers.  Equity investors may want to 
look at the fund's class A shares instead (ANEFX) which have been 
around for 20 years.  

In the next section, we tell you which funds we like on this list 
and why.     

Our Favorite Funds

Value-conscious investors have a couple promising funds to choose 
from on this list.  PIMCO Funds: Multi-Manager Series: NACM Flex-
Cap Value Fund D (PNFDX) seeks long-term capital appreciation by 
investing primarily in equity securities of large U.S. companies 
that, in the opinion of the portfolio managers, are "undervalued" 
at time of investment based on a number of valuation factors.  It 
is up 24.2% in the last three months, 2.4% better than the return 
of the S&P 500 index per Morningstar.  

Morningstar puts the PIMCO NACM Flex-Cap Value Fund in the large-
value style box while Lipper says the fund has a "multi-cap core" 
objective.  The fund holds mega-caps, large-caps and mid-caps, so 
it's true to its flex-cap name.  Long-term investors in search of 
a flex-cap fund with value/blend characteristics may want to take 
a closer look at this fund (www.pimcofunds.com).  Since inception 
(July 2002), the PIMCO NACM Flex-Cap Value Fund has gone up 30.2% 
in net asset value.

Artisan International Value Fund Inv (ARTKX) seeks maximum long-
term capital growth by investing in a portfolio of "undervalued" 
international companies.  N. David Samra has managed the product 
since its September 2002 inception.  Since inception, the fund's 
up 31.5%.  The fund family has enjoyed success in other products 
such as Artisan International Fund (ARTIX), boding well for this 
fund's long-term capital growth prospects.

Growth-oriented investors have a number of promising stock funds 
to select from on this list.  Forum Funds: Brown Advisory Small-
Cap Growth Fund A Class (BIAAX) is off to a promising start and 
while the fund may be new, the growth-oriented management style 
employed by the firm, Brown Advisory, isn't.  Brown Advisory is 
an independent investment advisory firm with over $5 billion in 
client assets managed.  Since its September 2002 inception, the 
fund is up 39.1%.

The same goes for the Federated Kaufmann Small Cap Appreciation 
Fund A (FKASX).  Lawrence Auriana and Hans Utsch, the successful 
co-managers of the Kaufmann Fund, are involved in the new fund's 
day-to-day portfolio management activities.  Like Kaufmann Fund 
in its early days, this new offering invests primarily in rapid-
growing companies with smaller market capitalizations at time of 
investment.  Since its December 2002 inception, the fund has put 
up a 37.4% return for investors.

The other fund we like is Fidelity International Small Cap Fund 
(FISMX) which started operations in September 2002.  It pursues 
long-term capital appreciation by normally investing in non-U.S. 
securities of companies with small market capitalizations.  The 
fund is up 33.3% since inception.

Conclusion

This week, we've profiled some of the fund industry's newer funds 
that have performed well since their respective inceptions.  Long 
term investors that believe we are in an uptrend may want to look 
at one or more of this rising stars.  Go to the respective family 
websites for more detail.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                  Tuesday 06-17-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: HCA
Daily Results
Call Play Updates: GENZ, IGT, LXK, MERQ, PGR
New Calls Plays: LH, MRK
Put Play Updates: KSS, WFMI
New Put Plays: None


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

None


PUTS:
*****

HCA, Inc. - HCA - close: 33.25 change: +0.29 stop: 33.50

Enough is enough.  Despite its relative weakness, shares of HCA 
are finding a pretty serious bid and we don't want to fight the 
rising tape any longer.  The real clue that we were caught on the 
wrong side of the trade came on Monday when the stock punched 
through both the 20-dma and 50-dma, where we had expected it to 
find resistance.  Confirming the significance of that breakout, 
the stock marched higher again on Tuesday without ever testing 
that broken resistance near $32.50.  Our $33.50 stop did provide 
some resistance today, but with the stock not really showing any 
weakness in the afternoon session, it is clearly time to cut this 
loser loose.  Traders holding open positions will want to use any 
weakness tomorrow morning to achieve a more favorable exit.

Picked on June 3rd at   $31.45
Change since picked:     +1.80
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume = 5.98 mln
Chart =



***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS    LAST      Mon    Tue   

GENZ     47.68    1.40  -0.43  Watch the $48 level
IGT      96.16   -0.40  -1.27  Ready for a dip?
LH       30.10    0.80   0.90  New, not over extended
LXK      74.60    1.63  -0.66  We are now triggered
MERQ     41.87    0.34  -0.00  Another day of sideways?
MRK      41.87    1.57   1.57  New, Drugs are back!
PGR      75.96    2.13   0.48  Incredible relative strength

PUTS

HCA      33.25    1.03   0.29  DROP, above its 50-dma
KSS      49.38    0.30  -1.02  Relatively weak
WFMI     47.40   -0.81  -1.35  New relative lows!


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PLAY UPDATES - CALLS
********************

Genzyme Corp. - GENZ - close: 47.68 change: -0.43 stop: 45.00

With the broad market unable to build on Monday's gains today, 
GENZ just wasn't able to sustain yesterday's breakout over the 
$48 level.  But there certainly wasn't a rush for the exits 
either, with the stock finding support just above $47 in what 
turned out to be a rather tight-range consolidation session.  The 
Biotechnology index (BTK.X) lost a bit of ground as well, but in 
the context of Monday's rally, nothing that a bull should be 
concerned about just yet.  GENZ is still obediently trading 
within that ascending channel, finding resistance at its midline 
Tuesday morning and coiling just below it for the remainder of 
the day.  A quick look at the hourly chart shows the constructive 
pattern of higher lows and higher highs that is supporting the 
stock's continual rise.  New entries are now looking decent near 
the $47 level and solid on a dip and rebound from $46 support, 
which happens to coincide with the bottom of the channel.  
Maintain stops at $45 until GENZ manages to close above $48.50.  
GENZ is trading in tandem with the BTK index, so watch for 
corresponding strength in the BTK before opening new positions.

Picked on June 8th at    $46.61
Change since picked:      +1.07
Earnings Date          07/16/03 (unconfirmed)
Average Daily Volume = 3.63 mln
Chart =


---

Intl Game Technology - IGT - cls: 96.16 chg: -1.27 stop: 92.00

IGT has been even stronger than we expected.  Friday's close 
looked like investors were indecisive and leaning towards some 
profit taking.  The stock popped higher again on Monday with the 
broad market rally.  Tuesday, the stock slipped a tad lower today 
and held above the $96.00 level for most of the session.  Shares 
remain very overbought but we're still gunning for a run to the 
$100 mark.  IGT has about 10 trading days left before its 4-for-1 
split and momentum traders will be looking to buy the dips.  If 
the markets pull back tomorrow we'd look for a dip to the $94.00 
level.  A bounce there might provide a short-term entry point.  
This should coincide with the rising 10-dma.  We raised our stop 
loss to $92.00 on Monday and we're going to leave it there for 
the next session or two as we see how IGT fares.  More 
conservative traders may want to consider a stop just under 
$94.00.  The stock has climbed so high that brokers are going to 
be tempted to downgrade the stock on valuation concerns.  We 
witnessed this today when Davenport & Co reduced IGT from a "buy" 
to a "neutral".  Shares held up pretty well despite the news.

Picked on June 10th at $91.87
Change since picked:    +4.29
Earnings Date        07/22/03 (unconfirmed)
Average Daily Volume =   1.22 million 
Chart link:


---

Lexmark Intl - LXK - close: 74.60 change: -0.66 stop: 71.00

Sure enough... the broad market rally on Monday helped power 
shares of LXK through that short-term descending trendline.  
OptionInvestor.com was triggered when LXK traded at $74.51.  The 
move above the $75 mark helped paint another column of X's into 
LXK's growing pennant formation on its point-and-figure chart.  
That pennant (or triangle) is getting ripe and we're expecting to 
see a breakout up or down any day now.  Of course we're expecting 
it to break out to the upside.  The afternoon bounce at $74.00 
today was positive but if the markets take another day to pull 
back then traders may want to look for a lower entry point near 
$72.00-72.50.  More conservative traders who would prefer to 
enter on momentum can look for a move above the $76 level.  
Yesterday we upped our stop loss to $71.00, which remains below 
LXK's simple 50-dma.  The stock appears to be holding up pretty 
well despite a Merrill Lynch analyst downgrading the entire 
hardware sector on Monday.  

Picked on June 16th at $74.51
Change since picked:    +0.09
Earnings Date        07/21/03 (unconfirmed)
Average Daily Volume =   1.78 million 
Chart link:


---

Mercury Int - MERQ - close: 41.89 change: +0.01 stop: 38.95

Things were looking a bit dicey for our MERQ play late last week, 
with the selling interest a bit too heavy for our liking in the 
wake of the JMP Securities downgrade.  But on both Friday and 
again on Monday, traders defended the $40 support level and we're 
starting to breathe a bit easier now with the 20-dma ($39.85) 
inching up on that level and the bottom of the ascending channel 
now at $39.50.  MERQ spent most of the Tuesday consolidating near 
the $42 level, but the drop at the close that took the stock back 
to yesterday's closing level doesn't look encouraging.  Based on 
the closing action, MERQ may be destined to test that $40 level 
one more time, and a successful rebound from above there looks 
like a decent setup for entering new positions.  Until we see 
some more constructive price action, entering on a breakout over 
intraday seems a bit too risky right here.  Maintain stops at 
$38.95 for now.

Picked on June 10th at   $42.62
Change since picked:      -0.73
Earnings Date          07/16/03 (unconfirmed)
Average Daily Volume = 4.45 mln
Chart =


---

Progressive Corp. - PGR - close: 75.96 change: +0.48 stop: 71.00

You want momentum?  PGR seems to have it, as it is continuing to 
charge higher after last week's breakout through the $73 
resistance area.  It certainly didn't hurt that the Insurance 
index (IUX.X) managed to clear the $275 resistance level on 
Monday, but PGR is clearly showing some strength as the slight 
retracement in the IUX today had little effect, with PGR closing 
with another gain and closing at yet another new all-time high.  
It is hard to gauge next resistance except by monitoring the 
stock's 3-month ascending channel, the top of which is currently 
at $77.25.  So it seems likely that PGR will have a hard time 
moving through that level in the near term without a little more 
consolidation first.  Aggressive entries can be considered on a 
dip and rebound from the $74 level (near the midline of the 
channel), while more favorable entry points will come from a 
rebound off the $72-73 area as old resistance is tested and found 
to be new support.  The bottom of the channel is just above $71 
right now, which accounts for our stop being placed there.

Picked on June 15th a  $73.27
Change since picked:    +2.69
Earnings Date        07/16/03 (unconfirmed)
Average Daily Volume =  989 K
Chart =



**************
NEW CALL PLAYS
**************

Laboratory Corp - LH - close: 30.10 change: +0.90 stop: 28.00

Company Description:
The first national clinical laboratory to fully embrace genomic 
testing, Laboratory Corporation of America® Holdings (LabCorp®) 
has been a pioneer in commercializing new diagnostic 
technologies. As a national laboratory with annual revenues of 
$2.5 billion in 2002 and approximately 24,000 employees, the 
Company offers more than 4,000 clinical tests ranging from 
routine blood analyses to sophisticated molecular diagnostics. 
Serving over 200,000 clients nationwide, LabCorp combines its 
expertise in innovative clinical testing technology with its 
Centers of Excellence. The Center for Molecular Biology and 
Pathology, in Research Triangle Park, North Carolina, offers 
state-of-the- art molecular gene-based testing in infectious 
disease, oncology and genetics. DIANON Systems, Inc., its 
Anatomic Pathology Center of Excellence, is a leader in oncology 
and genetic testing, and National Genetics Institute in Los 
Angeles is an industry leader in developing novel, highly 
sensitive polymerase chain reaction (PCR) methods for testing 
hepatitis C and other blood borne infectious agents. LabCorp's 
Minneapolis-based ViroMed offers molecular microbial testing 
using real time PCR platforms, while its Center for Esoteric 
Testing in Burlington, North Carolina, performs the largest 
volume of specialty testing in the network. LabCorp's clients 
include physicians, state and federal government, managed care 
organizations, hospitals, clinics, pharmaceutical and Fortune 
1000 companies, and other clinical laboratories. (source: company 
press release)

Why We Like It:
Healthcare and drugs are pretty strong sectors right now and 
shares of LH should benefit from renewed interest in these 
categories.  The company had pretty strong earnings in late April 
with a 20 percent increase in revenues over the same quarter a 
year ago.  Net income was up strongly from 46 cents a share to 51 
cents.  LH's CEO commented that the company continues to have 
high cash generation and that their two recent acquisitions are 
"meeting our synergy expectations."  Last quarter they also paid 
down $115 million of the $250 million borrowed to buy Dianon 
Systems. At the same time LH managed to buy $34 million of its 
own shares.  

Yet not everyone agrees that things are rosy at LH.  The last two 
months have seen a few brokers downgrade the stock based on 
valuation issues or concerns that the acquisitions are not 
merging quite as nicely as expected.  The early June declines 
stalled at $28.00 area, which coincided with LH's simple 100-dma.  
LH also benefited from a positive mention in Barron's a couple of 
weeks back when a fund manager suggested that shares of LH were 
very cheap at just 13 times current year earnings and 10 times 
free cash flow.

We also like how the stock has started to rebound up off the 
bottom of its slowly rising channel and doesn't look quite so 
extended as so many other stocks do in this market.  Of course 
one could argue that it has been relatively weak compared to the 
market as a whole and they would be correct.  However, now LH has 
a chance to "catch up" and potentially trade back to the top of 
its channel again.  Our short-term target is only $33.00 but 
aggressively we might shoot for a move to $35.00.  We're going to 
initiate the play with a stop loss at $28.00.

Suggested Options:
We like the July 30's and the August 32.50s as they're not too 
expensive and have decent open interest.

BUY CALL JUL 30.00 LH-GF OI= 871 at $1.50 SL=0.75
BUY CALL JUL 32.50 LH-GZ OI=1217 at $0.55 SL=0.00
BUY CALL AUG 30.00 LH-HF OI=3091 at $1.90 SL=0.95
BUY CALL AUG 32.50 LH-HZ OI=9052 at $0.85 SL=0.40
BUY CALL AUG 35.00 LH-HG OI= 404 at $0.35 SL=0.00

Annotated Chart of LH:

 

Picked on June 17th at $30.10
Change since picked:    +0.00
Earnings Date        07/28/03 (unconfirmed)
Average Daily Volume =   1.49 million 
Chart link:


---

Merck & Company - MRK - close: 62.37 change: +1.57 stop: 58.50

Company Description:
MRK is a global, research-driven pharmaceutical company that 
discovers, develops, manufactures and markets a broad range of 
human and animal health products, directly and through its joint 
ventures.  Additionally, the company provides pharmaceutical 
benefit services through Merck-Medco Managed Care, LLC.  The 
company's operations are managed principally on a products and 
services basis and are comprised of two business segments.  Merck 
Pharmaceutical is involved in marketing products, while Merck 
Pharmaceuticals is focused on therapeutic and preventive agents, 
sold by prescription, for the treatment of human disorders.  The 
pharmaceutical benefit services provided by Merck-Medco include 
sales of prescription drugs through managed prescription drug 
programs as well as services through programs to manage patient 
health and drug utilization.

Why we like it:
The Pharmaceutical index (DRG.X) has been looking ripe for a 
breakout for more than a week and PFE's raised guidance on Monday 
seems to have lit the rocket for the entire sector.  The DRG 
index broke above the $335 resistance on Monday and followed 
through with another 2.23% gain on Tuesday to end well above $340 
resistance.  In perusing the major Drug stocks, shares of MRK 
really caught our attention due to it's own breakout from a long-
term bullish wedge that has been building since last July.  
Strong resistance just above $60 was no match for the bullish 
enthusiasm seen in the stock and sector so far this week.  MRK 
blasted through that resistance and then followed up today with 
another 2.58% gain, resulting in a new 52-week high.  A bit of 
profit taking at the close kept MRK from ending at its high of 
the day, but the trend looks quite bullish.  Turning to the PnF 
chart, we can see it is on a solid buy signal, with a bullish 
price target of $75.  That looks good.  We don't want to get 
greedy though, so we're going to target a move to the $68 area, 
which is the site of pretty firm resistance from 2001.

Looking for the reason why MRK reversed so sharply right at the 
close?  Take a look at the gap down from last March.  The top of 
that gap was $63.44 and today's intraday high before the late-day 
drop was $63.40.  Coincidence?  Not likely!  Our preference would 
be for a retracement back down to the $60.00-60.50 area to 
confirm that level as newfound support.  A rebound from that area 
with the DRG index rebounding from above the $340 level would be 
just about the ideal entry setup.  With MRK closing well above 
its upper Bollinger band on Tuesday, a continued sharp rally 
without some consolidation first seems unlikely, so we're 
suggesting waiting for a pullback to initiate new positions.  
Because of our expectation for a pullback before the rally 
continues, we're setting a rather wide stop at $58.50.  This is 
just slightly below last Friday's intraday low and the 10-dma 
(currently $59.24).  It would take a significant change in 
sentiment to drive MRK below that level and right now that seems 
unlikely.

Suggested Options:
Shorter Term: The July 60 Call will offer short-term traders the 
best return on an immediate move, as it is currently in the 
money.  Note that June contracts expire this week.

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the July 65 Call.  This 
option is currently out of the money, but should provide 
sufficient time for the stock to move higher without time decay 
becoming a dominant factor over the short run.  More conservative 
long-term traders should utilize the October 65 call.

BUY CALL JUL-60 MRK-GL OI=40028 at $3.60 SL=1.75
BUY CALL JUL-65 MRK-GM OI=14222 at $0.95 SL=0.50
BUY CALL OCT-60 MRK-JL OI=12244 at $4.90 SL=3.00
BUY CALL OCT-65 MRK-JM OI=10179 at $2.30 SL=1.25

Annotated Chart of MRK:


 

Picked on June 15th a     $62.37
Change since picked:       +0.00
Earnings Date           07/21/03 (unconfirmed)
Average Daily Volume =  6.08 mln
Chart =



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PLAY UPDATES - PUTS
*******************

Kohl's Corporation - KSS - close: 49.38 change: -1.02 stop: 53.25

Now that's what we want to see!  After being sold hard all last 
week, shares of KSS caught a wee bit of a bounce on Monday, as 
the stock was caught up in the euphoria of the broad market and 
Retail index (RLX.X) charging to new highs for the year.  But 
relative weakness reasserted itself on Tuesday, with the stock 
giving back yesterday's gains and ending very near its low of the 
day on stronger than average volume.  Now that the oversold 
rebound is out of the way, we can consider momentum entries on a 
break below $48.75 (just below last week's intraday lows).  This 
morning's rollover below $50.50 was a solid entry point and 
successive failed bounces below $51 look attractive as well.  
Remember the $51 level was solid support before last week's 
breakdown and it should now act as resistance.  The $45 level 
still looks like a reasonable downside target, although there may 
be some intermediate support found in the $46-47 area, which 
provided support at the March lows.  Maintain stops at $53.25 
until the $49 level fails as support on a closing basis and then 
look to adjust stops downwards to $51.75.

Picked on June 15th at   $49.45
Change since picked:      -0.07
Earnings Date          08/14/03 (unconfirmed)
Average Daily Volume = 4.48 mln
Chart =


---

Whole Foods Market - WFMI - cls: 47.40 chg: -1.35 stp: 50.00*new*

Our bearish play on WFMI is progressing as planned.  Traders 
followed through on the failed rally at $50.00 last Friday and 
WFMI's performance on Monday was a huge demonstration of relative 
weakness.  We noticed the selling appeared to be picking up steam 
today as shares dropped 2.76 percent and closed below the 
intraday low last week on strong volume of 1.9 million shares.  
WFMI's P&F chart has painted a new column of O's and both the P&F 
and the daily chart appear to be forecasting a move to the $45.00 
level (if not lower).  This breakdown is very bad news for WFMI's 
weekly chart and suggest a possible move to the $40 area, which 
would also coincide with the P&F vertical count (target) of $41.

Picked on June 13 at $49.44
Change since picked:  -2.04
Earnings Date      07/30/03 (unconfirmed)
Average Daily Volume: 1.6 million
Chart =



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None


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The Option Investor Newsletter                  Tuesday 06-17-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - MRK
Traders Corner: Elliott Wave Plays


**********************
PLAY OF THE DAY - CALL
**********************

Merck & Company - MRK - close: 62.37 change: +1.57 stop: 58.50

Company Description:
MRK is a global, research-driven pharmaceutical company that 
discovers, develops, manufactures and markets a broad range of 
human and animal health products, directly and through its joint 
ventures.  Additionally, the company provides pharmaceutical 
benefit services through Merck-Medco Managed Care, LLC.  The 
company's operations are managed principally on a products and 
services basis and are comprised of two business segments.  Merck 
Pharmaceutical is involved in marketing products, while Merck 
Pharmaceuticals is focused on therapeutic and preventive agents, 
sold by prescription, for the treatment of human disorders.  The 
pharmaceutical benefit services provided by Merck-Medco include 
sales of prescription drugs through managed prescription drug 
programs as well as services through programs to manage patient 
health and drug utilization.

Why we like it:
The Pharmaceutical index (DRG.X) has been looking ripe for a 
breakout for more than a week and PFE's raised guidance on Monday 
seems to have lit the rocket for the entire sector.  The DRG 
index broke above the $335 resistance on Monday and followed 
through with another 2.23% gain on Tuesday to end well above $340 
resistance.  In perusing the major Drug stocks, shares of MRK 
really caught our attention due to it's own breakout from a long-
term bullish wedge that has been building since last July.  
Strong resistance just above $60 was no match for the bullish 
enthusiasm seen in the stock and sector so far this week.  MRK 
blasted through that resistance and then followed up today with 
another 2.58% gain, resulting in a new 52-week high.  A bit of 
profit taking at the close kept MRK from ending at its high of 
the day, but the trend looks quite bullish.  Turning to the PnF 
chart, we can see it is on a solid buy signal, with a bullish 
price target of $75.  That looks good.  We don't want to get 
greedy though, so we're going to target a move to the $68 area, 
which is the site of pretty firm resistance from 2001.

Looking for the reason why MRK reversed so sharply right at the 
close?  Take a look at the gap down from last March.  The top of 
that gap was $63.44 and today's intraday high before the late-day 
drop was $63.40.  Coincidence?  Not likely!  Our preference would 
be for a retracement back down to the $60.00-60.50 area to 
confirm that level as newfound support.  A rebound from that area 
with the DRG index rebounding from above the $340 level would be 
just about the ideal entry setup.  With MRK closing well above 
its upper Bollinger band on Tuesday, a continued sharp rally 
without some consolidation first seems unlikely, so we're 
suggesting waiting for a pullback to initiate new positions.  
Because of our expectation for a pullback before the rally 
continues, we're setting a rather wide stop at $58.50.  This is 
just slightly below last Friday's intraday low and the 10-dma 
(currently $59.24).  It would take a significant change in 
sentiment to drive MRK below that level and right now that seems 
unlikely.

Suggested Options:
Shorter Term: The July 60 Call will offer short-term traders the 
best return on an immediate move, as it is currently in the 
money.  Note that June contracts expire this week.

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the July 65 Call.  This 
option is currently out of the money, but should provide 
sufficient time for the stock to move higher without time decay 
becoming a dominant factor over the short run.  More conservative 
long-term traders should utilize the October 65 call.

BUY CALL JUL-60 MRK-GL OI=40028 at $3.60 SL=1.75
BUY CALL JUL-65 MRK-GM OI=14222 at $0.95 SL=0.50
BUY CALL OCT-60 MRK-JL OI=12244 at $4.90 SL=3.00
BUY CALL OCT-65 MRK-JM OI=10179 at $2.30 SL=1.25

Annotated Chart of MRK:


 

Picked on June 15th a     $62.37
Change since picked:       +0.00
Earnings Date           07/21/03 (unconfirmed)
Average Daily Volume =  6.08 mln
Chart =



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

Elliott Wave Plays
By Steve Gould

Company Profile

The Boeing Company (BA) operates in four principal segments: 
Commercial Airplanes, Military Aircraft and Missile Systems, Space 
and Communications and Boeing Capital Corporation. Commercial 
Airplanes operations principally involve development, production 
and marketing of commercial jet aircraft and providing related 
support services. Military Aircraft and Missile Systems operations 
principally involve research, development, production, 
modification and support of military aircraft, both land-based and 
aircraft-carrier-based, as well as helicopters and missiles. Space 
and Communications operations principally involve research, 
development, production, modification and support of space 
systems, missile defense systems, satellites and satellite 
launching vehicles, rocket engines and information and battle 
management systems. Boeing Capital Corporation is primarily 
engaged in the financing of commercial and private aircraft and 
commercial equipment.

Chart Analysis
Chart: Daily


 


Boeing has been in a 5 wave basic pattern up since March 12, 2003.  
Based on the wave 3 count (offered by the program) and the 
oscillator, the wave 3 looks just about complete.  Also, the pink 
and aqua bar represents a resistance level from the previous 4 
wave.  BA is currently up against this resistance level.  The 
interpretation of this bar is that BA is either going to reverse 
trend and start the 4 wave down or it is going to bust through it 
and continue higher.  This is an important pivotal point for BA 
and a strategic spot to place a non-directional play.


Chart Weekly


 


The weekly chart shows BA in a 5 wave basic pattern down.  BA is 
currently in a wave 4 correction.  The wave 4 looks like it could 
be complete based on the following factors:

1. The oscillator has retraced about 125%
2. Wave 4 has retraced about 62% of wave 3
3. Wave 4 has segmented into an A-B-C corrective pattern.
4. Wave 4 is about the level of the previous wave 4

Additional evidence to support a top:

5. The stochastics are overbought and trending down
6. The ADX line is at 47 and has only been this high at major 
pivot points.


Trade Setup

On the weekly graph, BA should reach 19 by the end of the year.  
On the daily graph, the Fibonacci retracements for the 4 wave 
range from 32.50 (38%) to 29.60 (62%).  BA could then head higher 
to 42-47 before ultimately heading down to 19.  I have devised a 
play to take advantage of either move.  As long as BA moves 4-5 
points either way (although there is a bullish bias), this play 
will make money with very little risk.

I am anticipating BA to make a move down to complete the wave 4 
(daily) and then a move up to finish the wave 5 (daily) and then 
ultimately down to 19.  This play takes advantage of this move, 
but works even if we are wrong.

Option
Pos  Num  Sym  Strike Month  Type   Bid    Ask   Delta   Vol   OI
Sell  1   BAGF  30.0  Jul 03 Call  6.10   6.40   99.5     5  2998 
Buy   2   BAAU  37.5  Jan 04 Call  2.70   2.85   52.6    28     0

Credit: 0.40


What If We Are Right

Chart: Position Analysis For The First Target


 

If BA does indeed drift lower over the next 5 weeks and on July 
expiration day closes at 30, the July option will expire 
worthless.  We then have a choice of closing out the trade for a 
$160 profit or seeing if BA will hit the 42-47 target.  If we 
decide to let the trade ride, then this is a completely risk free 
trade as the July option covered the cost of the January calls.  
If BA never goes higher, then we get to keep the credit of $40.

On the other hand, if BA trends higher, any move above 39.50 
becomes profitable.

What If We Are Wrong

Scenario 1

Chart: Wrong Scenario 1


 

If BA does not move at all and closes at 36 on the Wednesday 
before July expiration the play is down $48.  At this point buy 
back the July 30 call and sell the Aug 30 call.

Scenario 2

Chart: Wrong Scenario 2


 


The only other factor that can work against this play is if the 
implied volatility decreases.

Over the last 2 years, the lowest the implied volatility for BA 
has been has been about 28.

If BA does not move at all and closes at 36 on the Wednesday 
before July expiration the play is down $80.  The strategy is 
still the same.  Buy back the July 30 call and sell the Aug 30 
call.


Margin requirement

Because the difference in strike prices between the calls is 7.50, 
you will need a margin of $750 in your account.


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