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Daily Newsletter, Monday, 06/30/2003

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The Option Investor Newsletter                   Monday 06-30-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Best Quarter Since 1998.
Futures Wrap: End of the month
Index Trader Wrap: See Note
Weekly Fund Wrap: Mutual Funds Finish Week Lower
Traders Corner: Discipline Failure


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     06-30-2003           High     Low     Volume Advance/Decline
DJIA     8985.44 -  3.61  9068.05  8970.43 2.27 bln   1678/1564
NASDAQ   1622.80 -  2.46  1643.68  1621.44 2.08 bln   1596/1659
S&P 100   490.39 -  1.22   495.62   490.16   Totals   3274/3223
S&P 500   974.50 -  1.72   983.61   973.60
RUS 2000  448.37 -  0.38   452.64   446.20
DJ TRANS 2412.86 -  4.17  2432.56  2399.04
VIX        21.62 -  0.09    22.04    20.98
VXN        31.23 +  0.30    31.64    30.88
Total Volume 7,282M
Total UpVol  3,666M
Total DnVol  3,616M
52wk Highs  358
52wk Lows    30
TRIN       1.12
PUT/CALL   0.93
*******************************************************************

Best Quarter Since 1998.
by James Brown

Three months ago the Dow Jones Industrial Average had just closed 
at 7992.  It had just retraced one half of its rally from the 
March lows near 7416 to its monthly high near 8522.  Some traders 
were concerned that the close back under 8000 might be 
forecasting a retest of its recent (March) lows.  Oh what a 
difference three months can make.  In the last quarter we've seen 
the end of the Iraqi war, the passing of a $350 billion tax cut, 
a revival of corporate and investor interest in dividends, 
another interest rate cut by the FOMC, and a loudly declared (and 
loudly contested) end to the bear market.  Oh, and if you missed 
it, it was the best quarter for the markets since late 1998.  

As of the close today the DJIA is up 7.7 percent for the year, 
the S&P 500 is up nearly 11 percent and the NASDAQ Composite is 
up more than 20 percent (YTD).  However, at their recent highs 
two weeks ago both the S&P 500 index and the DJIA were up more 
than 25% from their March lows.  Passing them both was the NASDAQ 
Comp with a 31 percent gain from its March low.  Yup, it's been a 
pretty good quarter for equities.

What came as a surprise to many market watchers was the general 
lack of buying pressure today.  Some suspected that the last day 
of the quarter would be a strong one as funds did some last 
minute window dressing to spruce up their portfolios before 
mailing out their statements soon.  It looks like money managers 
have learned their lesson and did their buying early this year, 
hence the strong first two weeks of June.  That's not to say 
there wasn't any buying today - just the opposite occurred.  This 
morning saw the beginning of a decent rally, as well as a mid-
afternoon rally attempt.  Unfortunately, both were met with 
selling pressure that left the major averages virtually 
unchanged, albeit slightly negative for the day.  Market watchers 
suspect that the temptation to sell recent winners coupled with 
fund managers selling stocks that are being kicked off all 21 of 
the Russell indices outweighed the need to buy any stocks being 
added to the same indices.  

This index reshuffling contributed to the decent (summer) volume 
today with 1.8 billion shares trading on the NYSE and 1.96 
billion traded on the NASDAQ.  However, the market's 
indecisiveness is evident in its advance/decline numbers.  The 
NYSE shows 1442 advancing issues and 1418 declining.  The NASDAQ 
reported 1499 winners for 1568 losers.

Chart of the DJIA


 

Chart of the NASDAQ


 

Chart of the SPX


 


The big news today was the Chicago PMI report.  Today's report 
was for June and showed minor growth, but it was growth 
nonetheless.  May's number was 52.2 and June's PMI reading came 
in at 52.5, lead by an increase in manufactured goods.  Numbers 
over 50 represent an expanding economic climate while numbers 
under 50 are recessionary.  The New Orders section of the report 
showed a minor improvement from 54.6 in May to 54.8 in June.  The 
last few months have shown a string of economic reports that 
indicate a very slow but improving U.S. economy.  Today's PMI 
report merely reinforces that belief.  Tomorrow investors get a 
chance to react to yet another economic report, this one being 
the ISM index due out tomorrow.

The challenge that traders must face today is how to juggle the 
rise in stock prices.  The markets have run up on the expectation 
that a second half recovery will finally make an appearance this 
year after being stood up the last two years in a row.  The 
domestic economy is improving but at this glacial pace, stocks 
may be too expensive.  We obviously won't know how the third 
quarter will be until it gets here, but guess what the stock 
market is going to base its reactions on since it discounts 
future events, not past events?  Corporate guidance.  The 
direction for the next couple of months will be dictated by what 
corporate America has to say regarding their earnings forecast 
for the next quarter (or two).  As always it will make for an 
interesting earnings season.  Speaking of earnings, second 
quarter announcements will begin after the fourth of July holiday 
but they don't really pick up speed until Monday, July 14th.  
This week is still prime time for an earnings warning 
announcement, at least for anyone who announces in the second 
half of the month.

One earnings report a lot of tech investors will be watching is 
Intel Corp's (NYSE:INTC).  INTC is expected to announce on 
Tuesday, July 15th, 2003 after the closing bell.  Intel made 
headlines today as Clark Westmont, an analyst with Citigroup's 
Salomon Smith Barney, upgraded the stock from "in-line" to an 
"out-perform".  Clark also added INTC to SSB's "recommended list" 
and predicted that INTC would raise their 2004 profit margins and 
dividends.  Mr. Westmont's optimistic outlook for Intel included 
speculation that the company would meet or exceed Q2 estimates.  
He raised INTC's 2004 per-share earnings from 70 cents to 80 
cents per share.  Unfortunately, shares of INTC, which gapped up 
on the news, was unable to hold on to its gains and closed up 
just 24 cents or +1.16 percent at $20.81.  The SOX semiconductor 
index added $0.23 to close at 359.69.

Traders need to be careful here.  Traditionally, the shortened 
July fourth week is a bullish one for Wall Street.  However, 
given the extreme ramp up over the last quarter and the position 
of several major indices hovering anemically above support one 
needs to be careful when evaluating bullish plays.  We would not 
be surprised to see funds immediately begin undressing their 
portfolios, especially those money managers who have profits to 
lose.  TrimTabs, the preeminent source on fund flows and stock 
market liquidity, stated that they have turned "aggressively 
bearish" on equities.  The research firm cites the deluge of new 
corporate debt offerings and drought of stock buybacks combined 
with an extreme case of bullish sentiment by investors is a 
contrarian recipe for market weakness.

This is one time I'm apt to agree with them although my personal 
bias suggest the market top is either behind us or will be made 
in the next two to three weeks.

Watch those stops!


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

End of the month
Jonathan Levinson

Today's session was choppy and unpredictable, with more tentative 
trendlines drawn on my ES chart than actual price bars, it seems.  
The highest volume of the day occurred after the cash close, as 
the fully-dressed windows began to be unwound.  The ES plunged to 
a session low of 971 after the bell, and hovered, and then 
rocketed to 973.25 as I blinked at 4:15.

3 minute ES chart


 

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U      987    979    975    967    963
YM03U     9079   9016   8980   8917   8881
NQ03U     1230   1218   1210   1197   1189


10 minute chart of the US Dollar Index





The US Dollar Index spent the day selling off, beginning a gap 
fill below 94.80.  The action was slightly bullish for gold and 
the CRB, very bullish for the precious metals indices. 


Daily chart of August gold


 


Gold gave us a green day, fighting against its ongoing oscillator 
downphase.  The 344 support level continues to hold, with today's 
low session low at 344.70.  Most noteworthy, however, was the 
strength in the miners, with the Gold and Precious Metals Index 
(XAU) up 1.1 to 78.61, and the Goldbugs Index (HUI) up 2.47 to 
148.97.

Daily chart of the ten year note yield


 

Treasuries found some buyers today for a change, and the bottom 
in the ten year note yield is beginning to look like a reverse 
head and shoulders bottom to me.  If so, then today's 
countertrend dip should see the TNX reach a pattern target of 
3.88%, if it fulfils.


Daily NQ candles


 

The daily candles illustrate the degree to which nothing happened 
today.  The NQ was the only contract that printed an inside day, 
closing a couple of points in the green.  1202 was tested several 
times but barely cracked.

30 minute 20 day chart of the NQ


 

The NQ continues to work within a potential head and shoulder-
esque pattern, but the test will come at 1190.  The ongoing 
downphases on the short and longer cycle oscillators (daily and 
30 minute candle charts) suggests that we could see this test 
tomorrow.

Daily ES candles


 

Unlike the NQ contract, the S&P futures are much closer to a
neckline test, and today's action wasn't pretty.  There was a 
lower high, and lower low (after the cash close) and a slightly 
lower close.  While the daily candles show no violation of the 
neckline, the 30 minute chart below is far less pretty.

20 day 30 minute chart of the ES


 

You'd be very hardpressed to find anything bullish in this chart 
other than the so-far unviolated neckline in the 972 area.  The 
right section of this formation is not a bull wedge, but, if 
anything, a descending triangle, which tends to break south.  If 
it does, the head and shoulders target implies a 44 point drop 
below the neckline, if it plays out fully.

Daily YM candles


 

The daily trendline remains intact on the YM as well.  Today's 
candle would have constituted an inside day, except that today's 
low of 8944 matched Friday's low, and while it wasn't a lower 
low, it wasn't higher either.  Nevertheless, the cyclical picture 
is the same as for the other equity futures- in gear to the 
downside, except on the shortest intraday timeframes, where the 
post 4PM sellathon might have been a short term bottom on the 3 
minute candles.

20 day 30 minute chart of the YM


 

The bull wedge discussed over the weekend is not as clean as a 
descending triangle along the 23.6% fib line.  The oscillators 
and price action so far just don't look bullish to me, but this 
has been a year of surprises.  It will be far easier to predict 
direction below the h&s necklines.

There's not much to say about today's unpleasant, jerky session.  
With the end of month antics played by funds not the least bit 
interested in actually purchasing value for their unitholders, 
it's difficult to read the market.  Even Reuters ran a story this 
afternoon titled "Stocks up on Quarter-End Window Dressing".  For 
tomorrow, I'll be watching the levels profiled.  Below the 
necklines, I will be thinking aggressively bearish thoughts, and 
above, I'll remain antsy and uncertain.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_063003_1.asp


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

Mutual Funds Finish Week Lower

Mutual fund net asset values moved lower last week along with the 
global equity and fixed income markets.  According to Lipper, the 
average large-cap core U.S. equity fund lost 1.7% over the weekly 
period, a little less than the 1.9% weekly decline by the S&P 500 
index of large-cap U.S. stocks.  The average international equity 
fund lost 2.4% last week, lower than the 2.8% decline by the MSCI 
EAFE index of foreign developed markets.

Meanwhile, the average government and corporate bond fund lost in 
the neighborhood of 0.5%-0.6% over the week, per Lipper, matching 
the weekly decline by the Lehman Brothers Aggregate Bond Index of 
investment-grade U.S. bonds.  The average high-yield fixed income 
fund had a negative 0.3% return.  Global/international bond funds 
lost in the range of 1.3%-1.6% over the 5-day period, the biggest 
decliners over the 5-day period through June 27, 2003.

Equity Fund Group

 Week    YTD    Selected Lipper Equity Indices (Jun-27)
-1.3%   +8.9%   Balanced Fund Average
-1.7%   +9.7%   Equity Income Fund Average
-2.4%   +9.6%   International Fund Average
-1.7%  +10.3%   U.S. Large-Cap (Core) Fund Average
-0.6%  +14.3%   U.S. Mid-Cap (Core) Fund Average
-0.3%  +14.5%   U.S. Small-Cap (Core) Fund Average
-1.5%  +13.4%   U.S. Multi-Cap (Core) Fund Average
-1.5%  +22.6%   Science & Technology Fund Average


Each of Lipper's equity fund averages lost ground last week with 
international equity funds sustaining the week's greatest losses, 
off 2.4% on average.  Salomon Brothers International Equity Fund, 
Lazard International Equity Fund, Fremont International Growth 
Fund and Wells Fargo International Equity Fund declined by 4.0% 
or more to lead the foreign equity group lower.

Among U.S. stock funds, the week's biggest loser was the Frontier 
Equity Fund, down 11.8% over the week.  Another aggressive small-
cap fund, Polynous Growth Fund, lost 5.6%.  However, hefty losses 
weren't confined to small-cap and technology funds.  For example, 
ProFunds Ultra Dow 30 Fund posted a 4.7% negative return over the 
5-day period through June 27, 2003.  So, weekly losses were broad 
based.

Fixed Income Fund Group

 Week    YTD    Selected Lipper Fixed Income Indices (Jun-27)
-0.6%   +4.5%   Corporate A-Rated Debt Fund Average
-0.0%   +1.2%   GNMA Fund Average
-1.3%   +8.0%   Global Income Fund Average
-0.3%  +15.7%   High Yield Fund Average 
-1.7%   +8.3%   International Income Fund Average
-0.5%   +4.6%   Intermediate Investment Grade Fund Average
-0.5%   +2.4%   U.S. Government Bond Fund Average


U.S. fixed income funds generally lost less than 1.0% over the 5-
day period through June 27, while global and international income 
funds lost more than 1.0%.  Among U.S. fixed income funds, longer 
duration funds were hardest hit.  For example, Vanguard Long-Term 
Bond Index Fund, Vanguard Long-Term Corporate Bond, and Vanguard 
Long-Term Treasury Fund each lost around 1.5% over the past week.

Among global/international bond funds, the week's biggest decline 
was sustained by Prudential Global Total Return Fund, which ended 
the week down 3.2% (Class A shares).  Numerous other funds within 
the group lost 2.0% or more for the week.

Money Market Fund Group

Yield   Selected iMoneyNet Money Market Indices
0.64%   All Taxable MMF Average
0.55%   All Tax-Free MMF Average


Current yields on money market funds will be coming down further 
following the Fed's decision last week to lower short-term rates 
by a quarter percent (0.25%).  The iMoneyNet.com All Taxable MMF 
Average slid 0.03% last week, to 0.67%.  
 
The nation's largest retail money market fund, the Fidelity Cash 
Reserves Fund, sports a current 7-day simple yield of 0.92%, and 
a weighted-average maturity of 78 days.  Low-cost Vanguard Prime 
Money Market Fund has a 7-day yield of 0.87%.  They are two good 
money market funds.  

At 1.15%, PayPal Money Market Fund (402-935-7733) is one of four 
prime retail money market funds to still have a yield of at least 
1.00%.  Bunker Hill Money Market, Invesco Treasurers: MM Reserves 
and McMorgan Principal Preservation Fund are the three other MMF.  

Fund News, Etc.

In Morningstar.com fund news, Morgan Stanley announced last week 
that the firm has hired Bill Ennis, who was CEO of the Evergreen 
Funds, as president of global services.  He will oversee sales, 
distribution, and operations.  Morgan Stanley also said it will 
merge two institutional small-cap growth fund products.

Meanwhile, Franklin Templeton is re-opening its Micro-Cap Value 
Fund (FRMCX) as of June 30, 2003.  It had been closed since Feb. 
2002.  According to Morningstar, it was one of the fund funds to 
post gains throughout the bear market of 2000-2002.

According to the Investment Company Institute, stock funds had a 
net inflow of $12.1 billion in May 2003, following a $16 billion 
inflow in April 2003.  Fixed income funds had an inflow of about 
$9 billion in May, following a $10.5 billion inflow in the month 
of April.  Hybrid fund assets are also higher.

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

Discipline Failure
by Mark Phillips
mphillips@OptionInvestor.com

I started this process of describing a futures trading plan with a 
clear picture of the steps I needed to go through and the proper 
order for doing so.  I knew that it would be imperative to stick 
with a disciplined approach in order to clearly convey the 
strategy that I have adopted for my own futures trading.  The 
first four installments went very well, as we covered much of the 
necessary background before heading pell-mell into the fun part, 
which is talking about charts and the actual trading strategy.  
But last week, that discipline broke down in a big way.  We 
started out by describing the layout of my charting application, 
but then I got sidetracked into talking about several of the 
nuances of a specific day's trading signals.  I think the 
discussion was actually fairly clear, except that I leaped past 
several important points, the most critical of which was actually 
describing the framework of the strategy I employ.  OOPS!  Well, 
tonight, I'll step back a bit and try to fill in some of the gaps 
left open in last week's article.

The deeper we get into this discussion, the more necessary it 
becomes for those just joining us to catch up with the portion of 
the discourse that has already taken place.  If you're one of 
those newcomers, please take the time to catch up using the links 
below.

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

Back To The Future(s)
http://www.OptionInvestor.com/traderscorner/tc_060203_1.asp

Getting Ready To Launch
http://www.OptionInvestor.com/traderscorner/tc_060903_1.asp

Painting A Picture
http://www.OptionInvestor.com/traderscorner/tc_061603_1.asp

This article was supposed to appear last week, but due to 
technical difficulties and my being on a short vacation, it didn't 
make it.  So that puts us a week further behind in tying the 
various pieces together, but we're still making progress.  So 
enjoy last week's article this week and I promise to have this 
week's installment ready for next week.  Is that confusing enough?  
GRIN

First off, let's finish describing how my charting application is 
set up.  As I said last week, I run my charting application (I use 
Qcharts for those that are interested) on two 21" monitors.  I've 
already described the setup on the two primary screens, the first 
of which gives me the micro view with 10, 5 and 2 minute charts of 
the ES contract, using various indicators detailed in the chart in 
last week's article.  The second screen is devoted to monitoring 
breadth in the market, looking at 3 minute charts of the futures 
contract, ADVDECV and TICK for both the ES and NQ contracts.  Even 
though I only trade the ES contract, monitoring both allows me to 
get a feel for whether the ES or NQ is the stronger or weaker 
index for the day.  Divergence between the two can provide 
important clues as to whether strength or weakness may be 
transitory or persistent during the day.

While I mentioned in passing that there was another "screen" to my 
workspace, I neglected to detail what is displayed there and how I 
use it.  I have to scroll down to access this screen, but that 
isn't really a problem as this is the "big picture" portion of my 
workspace.  It is very simple, with just 3 charts displayed.  A 
daily, hourly and 30-minute chart of the ES, along with the same 
indicators shown on the shorter-term charts -- CCI (20), 
Stochastics (10,5,3), and MACD (8,18,6).  Additionally, I show a 
faster Stochastics (5,3,3) on the daily chart, as I've found the 
added responsiveness gives me a heads up to a potential trend 
change earlier than the (10,5,3) setting.

More important than what is displayed on this screen is how I use 
it.  In an intraday trading environment, there clearly won't be 
much change in the daily chart between the open and close, but a 
quick look at this view gives me a good feel for the dominant 
near-term (3-5 day) trend.  I know, when was the last time we saw 
a trend that lasted that long?  PAINFUL GRIN!  While it isn't an 
absolute, especially in the rather choppy trading environment of 
the past several weeks, when the daily oscillators are looking 
bullish, I'm looking predominantly for bullish trades.  When it 
looks bearish, I lean towards bearish trades.  Can a bearish trade 
be taken when the daily oscillators are looking bullish?  
Absolutely, but only if we can get a bearish oscillator setup on 
the hourly and 30-minute charts.  The best trend trades come from 
the daily, hourly, 30-minute, etc. charts all being aligned in 
either overbought or oversold and then beginning to reverse from 
the shorter term up towards the 30-minute and hourly charts.  This 
is the sweetheart trade setup, and when it occurs in conjunction 
with the ADVDECV chart agreeing with the direction of the trade, a 
large directional trade can unfold rather quickly and profitably.

The problem with this scenario is the current market.  Go back 
through the past few weeks and look at the alignments just of the 
hourly and 30-minute charts with Stochastics aligned in either 
overbought or oversold.  Look at the reversals out of that extreme 
region.  The first point I'll make is that there have been an 
inordinately high number of aligned reversals between these two 
charts that have either produced little or no movement, or the 
Sell/Buy signal has been quickly (prior to any significant 
favorable price action) turned and given a short-cycle reversal, 
resulting in a failed trade.  Keep in mind that my basic strategy 
is to go long on a reversal from an oversold alignment, looking 
for an 8-10 point gain on an initial stop of 3-4 points.  
Similarly, on bearish trades, I want to enter on a reversal from 
an overbought alignment across multiple time frames, looking for a 
comparable 8-10 point gain to the downside, risking 3-4 points to 
the initial stop.  Should be simple, right?  Well it was in the 
past, but not for the past several weeks.  Take a look at the 
chart below and I think you'll see the problem.

Hourly Chart of the ES

 

I really simplified this chart, taking all my indicators off 
except for the Stochastics.  That way we can focus on just that 
one indicator as it relates to price.  As you can see, over the 
past 3 weeks, there have only been 7 trade signals generated on 
the hourly chart and 4 of them would have resulted in a break-even 
or small loss.  Clearly that is not a recipe for long-term 
success, so we need other filters and tools to help weed out the 
bad trade signals.  Sadly, just dropping down to a shorter time 
frame (say the 30-minute chart) doesn't solve this problem.  Pull 
up that chart and look at the Stochastics over the same 3-week 
span of time and you can see that it is just as choppy and prone 
to false signals.

I think it is plain to see that this game requires more tools if 
we're going to consistently capture moves that meet the criteria 
of 8-10 points that I set forth in my initial trading plan.  Quite 
honestly, I've found those types of gains rather elusive in recent 
weeks.  But I also have not-so-distant memories of routinely 
capturing moves of that magnitude using the exact same strategy 
that I'm trying to describe here.  Is my system broken?  Or is the 
market behaving in a more irrational manner than usual?  I believe 
the answer to be the latter, but that leaves me with a choice.  I 
can either modify my methods to adapt to the current market, or I 
can choose to remain on the sidelines for much of the time, while 
still watching the action all day, every day.  Hey, if I'm going 
to have to watch the action anyways, I'd rather adapt my trading 
style to take advantage of what the market has to offer.  

The trading picture I highlighted in last week's article was my 
attempt to show how I've integrated several different tools to 
trade effectively in the current market.  I think now I've filled 
in some blanks from that article, including the rest of the 
trading screen setup that I use, along with how the longer-term 
charts integrate with the shorter-term view that I use for making 
most of my intraday decisions.  Next week we're really going to 
start having some fun, as I'm going to profile "a day in the life" 
looking at the decision-making process throughout a typical day.  
It will be rather chart-intensive, as it will require lots of 
pictures to show you what I see throughout the day, but it should 
integrate many of the tools I rely on.  In addition to the 
standard oscillators we've covered in passing here today, we'll 
link in the picture offered by the ADVDECV indicators, the Pivot 
and S/R values and any pertinent support/resistance and 
trendlines.

If things hold true to form, that discussion may actually get 
involved enough to require two separate articles, but I think it 
will be worth the effort.  After all, isn't that why we've been 
spending all this time together -- to see how all the tools come 
together into a coherent, actionable trading plan for the day?  
I'll try to make it as timely as possible and ideally will be able 
to feature a day that shows both winning AND losing trades.  
Balance is the key and this exercise certainly wouldn't be of any 
great benefit to you if all I showed you was the winning trade 
setups, now would it.

I can hardly wait to get started.  Look forward to really having 
some fun next week!

Mark


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The Option Investor Newsletter                   Monday 06-30-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: RYL
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - RYL
Watch List: A Quick List for Monday

Updated on the site tonight:
Market Posture: Minimal


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Note: Options involve risk. Risk disclosure: 

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


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

RYL - put
Adjust from $74.50 down to $73.50


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

None


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

None


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


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

The Ryland Grp - RYL - close: 69.40 change: -1.28 stop: 73.50*new*

Company Description:
The Ryland Group is a homebuilder and mortgage-finance company 
that has built more than 175,000 homes.  Additionally, the Ryland 
Mortgage Company (RMC) has provided mortgage financing and related 
services for more than 155,000 homebuyers. Currently, Ryland homes 
are available in more than 260 communities in 21 markets across 
the United States.

Why we like it:
It certainly hasn't been an easy road for traders trying to 
establish a winning short trade on the Homebuilders.  Last week's 
FOMC meeting just adding more volatility to the mix as investors 
had to contend with the issue of where interest rates are headed 
in addition to the issue of whether the stocks are actually 
overextended.  Based on the price action in the Dow Jones Home 
Construction index ($DJUSHB) over the past few days, we're left 
with the distinct impression that investors were really expecting 
a 50 basis point cut, rather than the 25 that was delivered.  The 
resultant rise in bond yields raises the specter of rising 
mortgage rates and that isn't going to be a bullish factor.  RYL 
has been all over the map over the past week, plunging below $70 
on two separate occasions, only to pop right back up to resistance 
in the $72.00-72.50 area.  Fortunately, each of these rebounds has 
met fresh selling and RYL ended the week right in the middle of 
its range.  That leaves us in between potential entry points.  
Failed rallies below the $73 level look good for aggressive 
entries, while those traders looking for confirmation before 
playing will want to wait for a break below $68.50 along with the 
$DJUSHB cracking its own support near $436.  Maintain stops at 
$74.50.

Why This is our Play of the Day
It finally looks like the bullish tone in the Housing sector is 
starting to fade, as the Dow Jones Home Construction index 
($DJUSHB) managed to take the top sector loser slot on Monday, 
sliding lower by 2.07%.  While our RYL play didn't actually break 
down, it looks very close to doing so, ending at its worst closing 
level since June 9th.  If the $DJUSHB loses the $430 support, then 
RYL ought to break below $68.50 and provide a solid momentum entry 
for a quick decline down to next support near $65.  The rebound in 
the daily Stochastics looks like it is fading and a short-cycle 
bearish reversal will be the likely result if that $68.50 support 
gives way.  Note that the $65 level is likely to provide mild 
support for at least a short-term bounce, as that is also the site 
of the lower Bollinger band.  Traders who entered the play at a 
higher level last week may want to consider harvesting partial 
gains on a rebound from that level.  Additionally, the 10-dma 
(currently $71.75) is exerting downward pressure or the past few 
days and failed rallies below that level can be used for more 
conservative entry points.  The intraday highs of last week's 
attempted rebound fell just shy of $73, so we feel fairly 
comfortable lowering our stop to $73.50.  If RYL closes above that 
level now, it would be a strong signal that there's less weakness 
in the stock than we currently perceive and we would want to be 
out of the play anyways.

Suggested Options:
Short-term traders will want to focus on the July 70 Put, as it 
will provide the best return for a short-term play.  Those looking 
for a larger move down towards the $65 level will want to utilize 
the July 65 contract or even the August strike, the latter of 
which provides greater insulation from the spectre of time decay.

BUY PUT JUL-70 RYL-SN OI= 898 at $3.10 SL=1.50
BUY PUT JUL-65 RYL-SM OI=1566 at $1.25 SL=0.60
BUY PUT AUG-65 RYL-TM OI=  61 at $2.85 SL=1.50

Annotated Chart of RYL:

 

Picked on June 22nd at   $69.95
Change since picked:      -0.55
Earnings Date           07/23/03 (unconfirmed)
Average Daily Volume =    905 K



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**********
Watch List
**********

A Quick List for Monday

Sina Corp - SINA - close: 20.31 change: +2.81

WHAT TO WATCH: Shares rose more than 16 percent today when the 
company raised its 2nd quarter outlook.  This Chinese online 
media company has been rising strongly with all the Chinese-
Internet related equities over the last four months.  The break 
out today represents new three-year highs.  Shares are 
optionable.  A pull back to $19.00 might make for a tempting 
bullish entry for an aggressive high-risk play but given the 
volume today the stock may not pull back that far.  Use caution!

Chart=


---

J.P. Morgan Chase Co - JPM - close: 34.23  change: +0.33

WHAT TO WATCH: JPM has lead the financial sectors higher with a 
huge rally of its own.  The stock is currently up 75 percent from 
its March lows making it one of the best performing Dow Jones 
Industrial components.  What are the odds that this equity could 
see some significant profit taking when the BIX and BKX break 
support?  If not when the banking sectors pull back, then how 
about after JPM's earnings release on July 16th.

Chart=


---


Intl Business Machines - IBM - close: 82.75 change: -0.67

WHAT TO WATCH: Speculation that IBM might double its dividend has 
done nothing to shake it out of this sideways pattern between $82 
and $86.  The 50-dma overhead remains resistance while the 200-
dma below remains support.  We suspect that IBM may be heading 
lower but there is risk that any corporate spin into its July 
16th earnings report could put bears in jeopardy until after the 
release.  We're going to watch for a break under $80.

Chart=


---


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

IDPH $33.96 - We highlighted shares of IDPH in the weekend watch 
list and suggested a move under $35.00 looked like a decent 
trigger point to go short.  Shares did just that on strong 
volume.  A test of $30 may not be far off.

KRON $50.85 - KRON was also on our weekend watchlist.  We 
suggested a move over $50 as a possible entry point for new long 
plays.  Looks like it's time to do a little due diligence for 
interested bulls.


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

Minimal

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