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Daily Newsletter, Monday, 07/07/2003

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The Option Investor Newsletter                   Monday 07-07-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Reordering the Alphabet
Futures Wrap: Another Flagpole Rally
Index Trader Wrap: Fsssss... BOOM!
Weekly Fund Wrap: Most Equity Fund Objectives Higher
Traders Corner: Trading Terminology
Traders Corner: Position Adjustment – Releasing The Choke Hold on 
the QQQs

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     07-07-2003           High     Low     Volume Advance/Decline
DJIA     9216.79 +146.58  9261.12  9073.92 1.79 bln   2198/1046
NASDAQ   1720.71 + 18.72  1721.25  1685.41 1.88 bln   2349/ 983
S&P 100   505.50 +  9.42   506.53   496.08   Totals   4547/2029
S&P 500  1004.42 + 18.72  1005.56   985.70
RUS 2000  465.71 +  9.36   465.71   456.35
DJ TRANS 2458.13 + 42.82  2463.03  2416.30
VIX        22.05 +  0.44    22.54    21.79
VXN        33.51 +  1.04    33.99    32.75
Total Volume 7,401M
Total UpVol  5,060M
Total DnVol  2,341M
52wk Highs     864
52wk Lows       23
TRIN          0.49
PUT/CALL      0.71
*******************************************************************

Reordering the Alphabet

When does the letter "s" outrank the letter "r"?  When markets 
surge and soar rather than retreat and retrace.  When support 
sustains the markets while resistance fails to restrain them. 

The surging and soaring began with the Asian and European markets.  
The Nikkei climbed to 9795, a closing level not seen since last 
August.  The Nikkei has already achieved the upside target 
promised by this spring’s inverse head-and-shoulders formation, 
but pushes ever closer to its magic 10,000 level.  As the opening 
of our markets approached, the DAX had already climbed toward its 
next resistance at 3325 and soon shot above that, with next strong 
resistance at 3500.

This morning’s early surge in the U.S. markets powered the SPX 
above 1000 resistance, the OEX above 500, the COMPX above 1700, 
and the DJI above 9200, and the indices closed above those levels.  
Although volume stood at a tepid 1.3 billion on the NYSE and 1.8 
billion on the Nasdaq, advancers beat decliners by more than 2:1 
on both exchanges.  Up volume measured 4.4 times down volume on 
the NYSE and almost 5 times down volume on the Nasdaq.

The surging markets make both bulls and bears nervous, with 
markets pundits across the globe questioning the gains.  These 
markets desperately need a pullback.  Or do they?  For a little 
while tonight, I’m playing devil’s advocate--or rather bull’s 
advocate--just as I did today on the Market Monitor. 

While most pullbacks retrace 1/3 to 2/3 of a previous move, strong 
markets sometimes retrace as little as 1/4 or 25 percent.  That’s 
already happened.  The standard Fibonacci retracement tool does 
not include a 25 percent retracement, but Q-charts allows a 
customization of the retracement tool.  I added the 25 percent 
retracement to many of tonight’s graphs.  Here’s what I found on 
the SPX daily chart.

Daily Chart of the SPX:





Last Tuesday, the SPX followed a bull flag down, trading as low at 
962.10, just off the 25% retracement of the March-to-June rally.  
After bouncing from that level, the SPX broke out of the bull flag 
to the upside and now trades safely back within its ascending 
regression channel.  Today, it broke back above its 21-dma and 
closed above that average.  Was this a stealth pullback, one we 
all noted at the time but didn’t consider the real pullback?  

Note that RSI broke above the descending trendline, tested it and 
headed back up again.  RSI trendline breaks often prove 
trustworthy.  They’re especially helpful because they sometimes 
lead price action.  In this case, RSI broke through its trendline 
last Tuesday, just as the SPX was bouncing from that 25 percent 
retracement line and heading up again.  Although the 5(3)3 
stochastics have zoomed up to levels indicating overbought 
conditions, they’re still in full bull run, turned straight up.  
The +DI portion of ADX has kicked back up again, although the ADX 
hasn’t yet followed.    

I’m supposed to be playing bull’s advocate, but that still-
declining ADX, coupled with what I know about historical trading 
patterns in July, makes me hesitant to believe the bullishness 
implied by the close above the 21-dma, the bounce from the 25 
percent retracement, the upside breakout of the bull flag, the 
bullish oscillators, and the close above 1000.  What’s it going to 
take to make me trust what my eyes are seeing?  A whole lot, 
apparently.  After the steep declines over the last years, I can’t 
stop the skepticism.  Apparently I’m not alone, either, as the two 
volatility indices, the VIX and VXN, gained 2.04 and 3.20 percent, 
indicating rising fear as the markets rose.  That rising 
fearfulness may be cheering the bulls, however, as markets need 
that wall of worry to climb.

Even a cautious market observer has to acknowledge the tenuous 
signs of economic recovery, but it’s difficult to put those signs 
into perspective when they’re liberally mixed with more troubling 
signs and fears of nasty surprises just around the corner.  
Today’s trading showed a refreshingly rational reaction to news, 
however, with many stocks sometimes trading according to their 
outlook, slipping if they offered bad news and gaining if they 
offered better news.  

For example, before the market opened this morning, drugmaker 
Schering Plough (SGP) debuted the warning season, saying that Q2 
and full year profit would be below expectations.  Blaming 
competitive pressures, SGP led analysts to expect Q2 earnings of 
12 cents per share, down from the previously expected 18 cents per 
share, and said second half earnings might not match those of the 
first half.  BMC Software (BMC) and Web content management 
software company FileNet (FILE) also warned.  Houston’s BMC said 
customers had delayed purchasing decisions.  A FILE spokesperson 
mentioned that large transactions had been deferred or delayed.  

Although FILE closed up, SGP and BMC both closed down, as did 
PRAA, the subject of a negative article in Barron’s, and RBAK, 
RITA, and WGRD, all of which either warned or lowered guidance.  
What I found interesting about those reactions was that the spate 
of warnings did not scare the markets or diminish their gains.  
While those stocks declined, ATYT, the subject of a positive 
article in Barron’s, and UNTD, MWD, BEBE, and CSL, all raised by 
various analysts, all gained.  Although I could point to 
exceptions such as CERN, which was cut to a sell but still gained 
on the day, stocks seemed to trade in a reasonable relationship to 
their current outlooks. 

I’m a little like the characters in the old movies with an angel 
on one shoulder and a devil on the other.  I’ve got a bull on one 
shoulder and a bear on the other.  The bear keeps whispering that 
any improved outlook is already built into prices.  Is it?  Is 
there even an improved outlook to be anticipated?  Today, CNBC 
mentioned a Merrill Lynch report staying that the IT spending 
cycle remained depressed.  Results of similar reports related to 
tech spending have been mixed over the last week.  A Goldman Sachs 
study of expected IT spending showed minimal changes from the 
year-ago period, a better-than-expected result since expectations 
had been for a decline of 3.2 percent.  

In addition to that better-than-expected result, other results 
have been positive.  Early last week, a CNN Money article referred 
to a CIO Magazine survey of chief IT officers at 311 companies.  
Of those that responded, 47.4 percent had either just replaced a 
significant number of PC’s or were currently doing so.  In an 
intraday email update today, Jeff Bailey referenced a Needham 
statement mentioning expectations for positive business momentum 
to continue.  A survey by Nikkei Market Access showed PC sales for 
the week ending June 22 climbing 20 percent from the year-ago 
level.

Certainly these varied outlooks offer some potentially bullish 
forecasts sprinkled among the bearish ones.  In this cluster of 
reports, the bullish reports might even outweigh the bearish ones.  
Those studying the markets must negotiate such conflicting 
outlooks with care.  How much weight should be given to the CIO 
Magazine survey?  How much to the Merrill Lynch report?  Is either 
outlook already priced into the market?

With the bear on one shoulder whispering "summer doldrums just 
ahead" and the bull on the other shoulder whispering "bullish 
chart formations," I’m adopting a wait-and-see attitude until the 
SPX clears the June 1015.33 high.  That June high now coincides 
with the resistance offered at the midline of the rising 
regression channel.  A close above that level would imply a move 
to the top of the channel, although not necessarily without an 
intermittent pullback or two.  That top-of-the-channel level would 
be marked by a move to 1045-1050 depending on how quickly the SPX 
rose.  Interim resistance would lie at the June high near 1015, 
also near 1027, and then at 1050, with 1050 being the strongest of 
the three.

If the SPX should achieve that 1050 level, the low daily ADX 
number hints that the SPX might settle into a trading range 
throughout the summer doldrums, perhaps between 937 and 1150.  If 
the SPX instead falls below 1000, watch for support near 990, also 
at 986, then at 972-975, historical support and the top of the 
bull flag.  Strongest support might lie at the 959-962 level that 
represents the 25 percent rally retracement.  SPX 929 represents 
the 38.2 percent rally retracement and also is the area of the 
200-ema, but there’s also light support at 935.

The OEX daily chart displays similar characteristics.  On July 1, 
the OEX dropped out of its regression channel long enough to 
achieve an intraday low of 484.41, approximating a 25 percent 
retracement of the spring rally.

Daily Chart of the OEX:




While retracing 25 percent of the rally, the OEX traded down in a 
bull flag, springing from the bottom of that bull flag at the same 
time that RSI broke above its formerly violated trendline.  As 
with the SPX, MACD flattens, but the +DI line of the ADX has 
kicked up again.  RSI and 5(3)3 stochastics remain bullish.  The 
OEX closed well above its 21-dma.  

Midline regression channel resistance for the OEX would be found 
at 510-513, and a close above that level would hint at a move 
toward the top of the regression channel.  The OEX would hit the 
top of that channel near 525, depending on how quickly it rose.  
The OEX might see light resistance near the June high, near 
417.50, near the top of the regression channel, and again at 533 
and 542.  If the OEX did manage a move to the top of the 
regression channel, the currently low ADX hints that it might also 
establish a trading range throughout the summer doldrums.

If the OEX should instead fall, it will fall back into the recent 
congestion zone with support layered underneath, perhaps strongest 
at 500.80-501, 497.60-498, and then between 489-491, at which 
point it would be testing the bull flag’s support.  Other support 
might be found at the 25 percent rally retracement just below 485, 
at 478.50-480, and at the 38.2 percent rally retracement and 200-
ema at 469-470. 

The DJI also touched its 25 percent rally retracement, doing so on 
July 1 when it also dipped to the bottom of its bull flag and then 
sprang up from that level.  I haven’t included the Fibonacci lines 
on this chart because I wanted to show a comment I’d first written 
on June 13, before that dip to the 25 percent retracement value, 
but the 25 percent retracement lies at about 8880.  On June 13, 
I’d speculated that the bullishness of the chart formation would 
be preserved with a fall to 88.80 (using the DJX chart as a proxy 
for the Dow’s).  I’d expected that plunge to 88.80 to take place 
sooner so that the DJX would have remained within the regression 
channel while retreating to 88.80, but the violation of the 
ascending channel was brief, taking place as the DJX traded within 
its bull flag.  

Daily Chart of the DJX:




I can add little to a discussion of this chart that hasn’t already 
been said about the other charts.  The bull flag, the regression 
channel, the close above the 21-dma, and the positive RSI action 
all appear similar.  

Midline resistance would be found between 93.20-93.80, depending 
on how quickly the DJX rises.  A close above that midline 
resistance and the June high might portend a move toward the top 
of the regression channel, near 95-95.50, depending on how quickly 
the DJX rose.  Other resistance might be found at 9700 and 9900, 
but the DJX might also retreat once it hit the top of its 
regression channel.  ADX measures less than 20, an indication of 
range-bound rather than trending markets.

If the DJX should instead decline, participants could first watch 
for support at 9200, then in 50-point increments down to 8950.  
The 25 percent rally retracement lies at 8880, some support exists 
between 8710-8740, and the 38.2 percent retracement and 200-ema 
lie between 86.20 and 86.50.

When studying the NDX chart, it quickly becomes apparent that the 
NDX has already moved above the midline resistance on its rising 
regression channel.  This perhaps portends that other indices will 
do so, too.  Although a classic bull flag might see a tighter 
range of lower highs and lower lows, the NDX pattern over the last 
several weeks could also be described as a bull flag, with the 
breakout having taken place.  The NDX moved above its 21-dma last 
week, perhaps also portending that the other indices would do so 
today.  It also tested and sprang up from its 25 percent rally 
retracement level and RSI broke above its trendline as that was 
happening.  

Daily Chart of the NDX:




This action hints that the NDX will test the top of its regression 
channel, perhaps near the 1320-1350 historical resistance, 
although market participants might have liked a bigger closing 
margin above its 1280 former resistance before they started 
counting on testing higher resistance.  Oscillators look bullish, 
however, with the ADX above 30 and perhaps turning up again.  

Support lies beneath at 1280, although that support remains 
questionable, between 1265-1266, near 1250, and between 1220-1223.  
A steeper fall might bring the NDX back to test its 25 percent 
rally retracement at 1184 or to 1180 support.  Other support can 
be found between 1162.50-1165.50 and then at 1140, the site of 
historical support and the 38.2 percent rally retracement. 

Even though I’m viewing these charts with a bear sitting on one 
shoulder, the indices seem primed to move higher, perhaps only 
over the next week or so with maybe a down day or two along the 
way.  Many 30-minute and 60-minute charts display oscillators that 
indicate short-term overbought markets, but the high ADX levels on 
those 30-minute and 60-minute charts hint that the upward trend 
remains strong and that oscillators can’t be trusted.  I’m still 
inclined to listen to the bear, particularly with the summer 
doldrums almost upon us, so can’t quite believe the evidence I’m 
seeing.  Not even the bear is whispering that it’s time to short 
the markets just yet, though.  He’s just growling warnings.

Tomorrow, that may all change.  What would change the outlook?  
Nothing I can predict at this point since earnings and economic 
releases will be light.  AA will report.  As Jim mentioned this 
weekend, this will be the first Dow component to report. GE 
reports on Friday.  Nasdaq biggie YHOO reports on Thursday.  

Tomorrow morning’s economic reports include Chain Store Sales at 
7:45 ET, previously -0.5%, Redbook Retail Sales at 9:00, 
previously +0.9%, and the June Richmond Manufacturing Index at 
10:00, previously at -5. 

Out of those numbers, the Richmond Manufacturing Index at 10:00 ET 
might be the most likely suspect to initiate a pullback on those 
30-minute and 60-minute charts.  May’s Consumer Credit will be 
released at 3:00 p.m. ET, previously $10.7 billion and with a 
market consensus of $5.0 billion for May, but with predictions 
ranging from $1.5 billion to $5.3 billion.  As the wide-ranging 
predictions demonstrate, this number can prove volatile.  Perhaps 
due to the warnings Jonathan Levinson and others have issued about 
the dangers of higher consumer credit, market participants should 
pay more attention to this number than they usually do.  Because 
of that volatility and because the information is considered old 
news, it’s not often a market mover.   

Earnings warnings are likely to accumulate as the week progresses.  
Also, as the end of the week approaches, expect attention to focus 
on Friday’s upcoming economic release of the PPI and core PPI.  
Numerous weekend articles focused on Friday’s PPI, with many 
articles speculating on the various forces that might impact the 
number.  For example, producers from car manufacturers to 3M have 
been using incentives and discounts to prop up demand and undercut 
competitors.

Be careful picking a top just yet.  If markets are going to dive 
rather than consolidate, we’ll have evidence of that happening 
when key support levels are violated, and you may just get a 
better chance for a higher top.

Linda Piazza


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

Another Flagpole Rally
Jonathan Levinson

In what is by now a well-worn script, equities climbed throughout 
the night before launching in a near-vertical move, printing a 
"flagpole" within the first 45 minutes of the cash session, and, 
for the remainder of the day traded in a tight horizontal range 
along the top.  It was a very bullish day for equities, albeit on 
relatively light volume, bearish for treasuries and gold.

3 minute ES candle chart


 

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U     1017   1010    998    991    980
YM03U     9337   9268   9170   9101   9003
NQ03U     1317   1301   1270   1254   1222


10 minute chart of the US Dollar Index




The US Dollar Index printed a huge sell candle, followed by a 
huge buy candle, and then stair-stepped to new highs above 95.50.  
It was almost as if someone hit the wrong button on that opening 
sell, and then corrected it one tick later.  The action was 
bearish for gold, but surprisingly, the commodities index (CRB) 
was actually positive on the day, led by natural gas, copper and 
live cattle futures.

Daily chart of August gold


 

Gold got sold off to the middle of its recent range, dropping 3 
points to 348.30.  Both the XAU and HUI got sold as well, but 
shallowly, recovering just before the close, with XAU finishing 
lower by .97 to 78.84 and HUI -.69 to 153.96. 

Daily chart of the ten year note yield


 

Treasuries also got sold off, chopping steadily lower throughout 
the session.  The move was sufficiently extreme to print most of 
today’s closing candle on the Ten Year Yield above the upper 
Bollinger band, which should be good for a downside correction 
tomorrow, which means a move higher for treasuries.  The Fed 
added 6.5B net in overnight repos, which should have hurt the US 
Dollar and helped treasuries, but if it did, it certainly wasn’t 
apparent from either the chart of the TNX or the US Dollar Index.


Daily NQ candles


 

That would be a Rocket Powered Bullish Engulfing Candle printed 
today, setting a new rally and year high on the Nasdaq futures.  
It closed one point below its high of the day, never dipped or 
pulled back, and turned the oscillators up on bullish buy signals 
before even approaching oversold territory.

30 minute 20 day chart of the NQ


 

As we can see, the move exceeded the bullish descending wedge 
upside target, and the oscillators on the 30 minute candles are 
hinting at sell signals within this shorter timeframe.  No 
kidding.  After the past two sessions with barely the whiff of a 
pullback, some kind of correction is to be expected.

Daily ES candles


 

The S&P futures were no slouch either, but paled in comparison to 
the move on the NQ contract.  Note how the MacD oscillator hasn’t 
printed its confirming upside cross yet.  The rally high was 
missed by 11 points, but if the NQ tends to lead the way, there 
could be much further for the ES to go.


20 day 30 minute chart of the ES


 

The oscillators on this shorter 30 minute timeframe are on clear 
sell signals, but the correction was good for all of 2.25 points 
as of this writing.  I suggest that you look at the pivot matrix 
posted above for the ES futures-  I’ve been watching the tape 
since last night, and the levels it calculated coincide exactly 
with my chart-based observations as posted in the intraday Market 
Monitor.  I like to see confirmation of my work, and the pivot 
calculator seems to be doing so here.

Daily YM candles


 

The Dow futures are telling the same story as ES.

20 day 30 minute chart of the YM


 

The charts really speak for themselves.  Bears will be jumping up 
and down.  Why did the Fed add so much intervention money in 
today’s open market operation?  Why did bonds sell off with a 
huge move upward in the US Dollar Index?  Why did the option 
volatility indices, the VIX, VXN and QQV, all rally today, moving 
higher with equities?  Why was the put to call ratio not higher?  
Why was it not lower?  What about the low volume?

Bulls are buying because it’s going up.  Relief rally because of 
the blessed absence of domestic disaster over the holiday 
weekend, or because of oversold oscillators from Thursday, it 
doesn’t matter.  Whatever the reason, the charts tell us to 
expect a pullback within the context of a strong prevailing 
uptrend on the dailies.  A violation of the ascending trendlines 
on the dailies will be cause to re-evaluate, and I personally 
feel that it’s not a question of "if", but rather "when".  
Nevertheless, dips to support should be bought with active stops 
until the charts tell us otherwise.  See you at the bell! 


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

Fsssss... BOOM!

Technology stocks lead today’s bullish session after a report in 
The Financial Times that Microsoft (NASDAQ:MSFT) $27.42 +3.47% 
may be ready to distribute roughly $10 billion of its $46 billion 
stockpile of cash to shareholders in the form of a one-time 
dividend provided an early morning catalyst for gains.

Reports out of Asia that a lessoning of SARS cases has brought a 
resurgence in demand for PCs along with multiple positive 
comments from brokers in the semiconductor sector fueled gains 
into the close, with Goldman Sachs’ Laura Conigliaro saying that 
the firm’s latest information-technology survey showed a strong 
outlook for Intel-based servers.

The "weakest" performing technology sector was the GSTI Software 
Index (GSO.X) 131.82 +3.12%, with BMC Software (NYSE:BMC) $15.09 
-8.37% weighing on the groups otherwise bullish session as the 
company said current quarterly results were being hurt by delayed 
corporate spending for its software products.

Technology sector strength and many four and five lettered stocks 
surged in the session, helping lift both the broader NASDAQ 
Composite (COMPX) 1,720 +3.44% and NASDAQ-100 Index (NDX.X) 
1,281.89 +4.28% to new highs as bulls and bears flocked to their 
favorites by sending 390 stocks on the NASDAQ to 52-week highs 
compared to a meager 8 stocks hitting new lows.  Today’s 390 new 
52-week highs on the NASDAQ was the second highest total this 
year when compared to 439 new highs found on June 6th.

NASDAQ Composite Chart - Weekly Intervals


 

52-week high/low breadth had been falling off in recent weeks and 
it was looking like the NASDAQ Composite may have "topped out" 
with resistance at 1,685.  A resurgence in bullishness today has 
the NASDAQ Composite breaking above 5-week resistance and new 
highs of 390 gives some confirmation to the move higher.  While 
our DAILY ratio of new highs versus new lows reads 98.0%, it has 
the 10-day average of new high/new lows turning up to 93.3% for 
the first time since "peaking out" on June 17th at 97.8% and 
gives the impression that bullish leadership may take hold over 
the next couple of weeks.  

NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - Daily Interval


 

The QQQ and NASDAQ-100 Index (NDX.X) 1,281.89 +4.10% exploded to 
the upside with the "5 horsemen" or largest weighted stocks 
gaining a minimum of 3.47%.  While MSFT’s 3.47% gain seems 
"minimal" its 10.2% weighting, which is nearly double that of 
Intel (INTC) was HUGE for the QQQ.

Today’s move above $27.00 for MSFT breaks formidable resistance 
for that stock and should have support building at that $27.00 
level.  With MACD crossing above its Signal on the QQQ, I’ve got 
to be looking for support at $31.43 on any type of profit taking 
pullback and with such a fierce move higher from short-term 
downward trend in today’s trade, the MONTHLY R2 of $32.40 is in 
play.

While BMC Software (NYSE:BMC) $15.09 -8.37% is not a component of 
the NASDAQ-100, it is "tech" and today’s quarterly earnings 
warning continues to show that there are still some very soft 
spots in corporate IT spending, which right now, the MARKET seems 
willing to look past for broader technology, but I’d still use 
these types of warnings as a "reason" to NOT BE OVERLY LEVERAGED 
from the bullish side in the QQQ/NDX.

At the same time, I made note in today’s Market Monitor that 
discount airliner Frontier Airlines (NASDAQ:FRNT) $11.48 +17% was 
moving above $10 resistance earlier in the morning, jumped to an 
8% gain when the company guided higher on quarterly earnings and 
built further gains into the close.  FRNT is not a NDQ/QQQ 
component either, but gives the impression that if there are some 
"upside surprises" to the bottom line on improving demand, 
there’s one heck of a lot of bullishness that is unfolding, 
especially in stocks where short interest is building!  FRNT 
doesn’t trade near the volume the "Big 5" in the NASDAQ-100 does, 
but its short interest jumped to 3.4 million by June 13th, from a 
May 15th 2.7 million shares.  

It’s one thing for bears to be covering simply based on price 
action like I think we are seeing in the QQQ, and it would 
certainly appear that the slightest amount of "good news" in 
fueling gains.

Intel (INTC) $22.90 +5.47% and Amgen (NASDAQ:AMGN) $68.91 +3.81% 
both traded new 52-week highs today and there appears to be a 
significant lack of supply for these two stocks and short 
interest was building in both from May 15th to June 13th.

Today’s trade saw a net gain of 1 stock to a point and figure buy 
signal in the NASDAQ-100 Bullish % ($BPNDX).  This has the 
bullish % still "bull correction" status, but moving up from last 
Wednesday’s 74% reading to 77%.

I should also make note that after trading the $29.40 level last 
week and our "finite stopping" level for bullish on the 
unconventional $0.35 box scale for the QQQ, today’s trade at 
$31.50 was a break to new highs which should have bears VERY 
defensive and further trade high at $31.85 gives me the 
impression that buyers (short-covering or new bulls) are very 
aggressive.  This type of action should have bearish traders in 
the other indexes, which haven’t broken above their June highs 
quickly assessing bearish risk in their accounts.

S&P 500 Index (SPX.X) Chart - Daily Interval


 

I saw nothing bearish in today’s trade for the SPX and must say 
that I’m not a "full of conviction bear" even at partial bearish 
position.  After the first hour of trading, the SPX traded 
between 1,002 and 1,005 the remainder of the session.  The only 
"negative" I do see was at the end of today’s trade when the S&P 
500 Bullish % ($BPSPX) showed a net loss of 4 stocks to point and 
figure sell signals as the bullish % slipped 0.8% to 77.2%.  This 
is considered "bearish divergence."  I’m thinking these sell 
signals were likely to have come from the energy sector and 
perhaps Oil Service (OSX.X) 88.72 -2.84% which was today’s 
weakest sector.  

The narrower S&P 100 Bullish % ($BPOEX) saw a net gain of 1%, 
with the bullish % rising to a bullish cycle high reading of 82%, 
which on a comparison basis has me thinking it was some energy 
stocks giving reversing sell signals.  I’ll try and check what 
stocks may have shown weakness when Dorsey/Wright and Associates 
updates their charts.  I can sort for stocks that gave sell 
signals in today’s trade.

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


 

If not for the slippage in the S&P 500 Bullish % ($BPSPX) on a 
broader scale, I’d be much more bullish the narrower S&P 100 
Index (OEX.X) by today’s close as the narrower bullish % is once 
again matching its bullish cycle high reading of 82% and looks to 
have its WEEKLY S2 of 510.63 and June 17th closing high of 512.67 
in reach.  Other than potential resistance at WEEKLY R1, the main 
technical resistance I would be cognizant of is the mid-point of 
our regression channel, which when broken to the downside on June 
23rd, saw a test/violation of lower regression, with now looks to 
have a bounce higher in full swing.  My thinking that the OEX may 
have resistance near 514 is that the mid-point of this regression 
channel has at times served support, which after being broken to 
the downside might come back into play on a further spike higher 
at 513.

While brokers got an upside surge to their June highs on comments 
that "make sense" regarding stronger trade levels from retail 
investors and a pickup in merger/acquisition activity, the banks 
are lagging the brokers somewhat, and my best guess is that the 
higher YIELDS in Treasuries may indeed have some sector bulls 
being cautious on thoughts that the next move by the Fed is going 
to be raising rates, not cutting them further, which can be 
viewed as a negative for the sector.

Still, I’m keeping an eye on Bank of American (NYSE:BAC) $80.90 
+1.11% as it trades a new 52-week high, which is a component of 
both the S&P Bank Index (BIX.X) 309.85 +1.43% and KBW Bank Index 
(BKX.X) 884.41 +1.92%.  The trade action in BAC certainly has to 
hint that the BIX.X and BKX.X should follow this type of 
leadership.

Dow Industrials (INDU) Chart - Daily Interval


 

Alcoa (NYSE:AA) $25.71 +1.62% is first Dow component to report 
earnings and they are due to announce tomorrow morning.  While AA 
has gained nearly 35% from its March lows of $19.00 and there’s 
obviously been some type of "expectations" built into tomorrow’s 
earnings report, earnings along with forward outlook and any 
"dividend policy changes" could be the needed catalyst for a Dow 
move higher.  (Consensus is of AA to earn $0.25 per share)

I can’t say for certain that "everyone" is going to be listening 
to what a Dow component has to say about how things are "shaping 
up" but with the indexes above or nearing their June highs, any 
type of bullish comments for a deep cyclical rooted in the 
economy should have some type of impact and could influence 
trade.

I’m also keeping an eye on General Motors (NYSE:GM) $35.90 
+0.33%, which remains pegged near the $36 level, with its 
intermediate-term 50-day SMA ($35.91) still unable to get a 
"bullish crossover" above the longer-term 200-day SMA ($35.95) 
with today’s trade.

The "fundamental" side of me continues to struggle with the gains 
found in many technology stocks, that are "dependent" on some of 
these bigger cyclical stocks to buy technology from, which so 
far, we haven’t seen them spend with plenty of production 
capacity still unused.

While quarterly bottom line earnings will be closely listened to, 
I’d also be listening for forward guidance, but also dividend 
policy going forward.  I don’t think many Dow components will be 
cutting dividends, and if anything, would be raising dividends.

Microsoft (NASDAQ:MSFT) $27.42 +3.47% when questioned about their 
potentially raising their dividend did say late today that they 
would not comment at this time.  Microsoft is scheduled to 
release quarterly earnings on July 17th.

Today’s trade saw a net gain of 1 stock to a point and figure buy 
signal in the very narrow Dow Industrials Bullish % ($BPINDU) and 
has this bullish % rising 3.33% to a bull cycle high reading of 
86.67%!  

International Business Machines (NYSE:IBM) $86.09 +2.54% was the 
stock to reverse a prior sell signal given at $84.00 on June 3rd, 
which came on news of an SEC investigation into its accounting.  
Today’s trade at $86.00 was the reversing point and figure buy 
signal level.

Here’s a quick look at the Pivot Analysis Matrix.

Pivot Analysis Matrix -


 

Stocks and Treasury YIELDS as depicted by the 10-year YIELD 
($TNX.X) have started to show more correlation in the past week, 
with selling in Treasuries seemingly freeing up cash that may 
indeed be finding its way toward stocks. (see monthly and WEEKLY 
matrix today).

However, the U.S. Dollar Index (dx00y) 95.53 +0.31%, which 
measures the strength of the dollar against a basket of 7 foreign 
currencies has also been showing strength and matching stock 
price action in recent weeks, so I’m not entirely comfortable at 
this point in saying that higher YIELD results in higher equity 
price, or vise versa.  

Combined, the Dollar strength depicts that of cash coming back to 
the U.S., while selling in Treasuries against the dollar has the 
look that the money is staying here in the U.S.  From what I’ve 
read, foreign government bonds are seeing selling with their 
equity markets seeing gains.

I’ve "dashed green" some correlative near-term support levels for 
tomorrow, as these support levels were traded through to the 
upside today.  

The QQQ ticked higher from its 04:00 PM EST mark, when the 
NASDAQ-100 Index (NDX.X) itself closed, but here, in the NDX we 
see correlative resistance first near 1,292 and then higher still 
at 1,302. 

Jeff Bailey


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

Most Equity Fund Objectives Higher 

According to Lipper, most equity fund objectives were higher over 
the 5-day period through July 3, 2003, but weak unemployment news 
took stocks down in Thursday’s holiday-shortened session.  A jump 
in the U.S. employment rate from 6.1% to 6.4% in June spurred the 
round of selling.  Vanguard Total Market Index Fund, which tracks 
the total return of the Wilshire 5000 index, the broadest measure 
of the U.S. stock market, produced a weekly return of 1.1%.  Most 
diversified U.S. stock funds fell short of that.




 


In terms of market capitalization, small-cap funds outpaced their 
large-cap peers, which produced minimal returns.  Growth-oriented 
funds, meanwhile, outperformed value-driven funds overall.  Tech-
sector funds were the best performing U.S. equity fund group, up 
2.1% on average over the 5-day period through July 3, per Lipper.  
Small-cap growth funds averaged 2.0% for the week, while mid-cap 
growth funds picked up 1.2% on average, per Lipper. 

Weekly total returns were stronger for international equity funds 
also.  Vanguard Total International Stock Index Fund, which seeks 
to match the total return of the total international stock market 
(MSCI EAFE plus MSCI Select EMF index), generated a weekly return 
of 1.6%.  Most international and emerging-market equity funds did 
better than that, particularly those overweighted to Japan.  Gold 
mutual funds shot up 4.7% on average in the last five days, using 
Lipper’s numbers through July 3, 2003.

Vanguard Total Bond Market Index Fund, which replicates the total 
return performance of the Lehman Brothers Aggregate Bond Index, a 
broad measure of investment-grade U.S. bonds, was 0.1% lower over 
the 5-day period.  Weekly declines increased as you moved further 
out on the yield curve.  Vanguard’s Intermediate-Term Bond Index 
Fund was down 0.4% for the week, while Vanguard’s Long-Term Bond 
Index Fund was 0.8% in the red.  According to Lipper, most fixed 
income objectives contained their average weekly losses to below 
0.3%.

Equity Fund Group

 Week    YTD    Selected Lipper Equity Indices (Jul-03)
+0.0%   +9.5%   Balanced Fund Average
-0.1%  +10.5%   Equity Income Fund Average
+2.1%  +11.5%   International Fund Average
+0.1%  +11.3%   U.S. Large-Cap (Core) Fund Average
+0.9%  +15.6%   U.S. Mid-Cap (Core) Fund Average
+1.5%  +16.3%   U.S. Small-Cap (Core) Fund Average
+0.2%  +14.4%   U.S. Multi-Cap (Core) Fund Average
+2.2%  +26.0%   Science & Technology Fund Average


Among funds with over $500 million in assets, the highest weekly 
total return belonged to Vanguard Pacific Stock Index Fund, 5.1%.  
T. Rowe Price New Asia Fund was second with a 4.5% weekly return.  
So, so strong relative returns from Japan and the Pacific region.  
Fidelity Select Gold rose 4.2% for the week to lead the gold fund 
group higher.

RS Diversified Growth Fund, a small-cap growth fund, gained 3.4% 
for the week, highest among "growth" funds with assets over $500 
million.  Oppenheimer Discovery, another small-growth style fund, 
generated a 1-week return of 2.6%.  International funds with pro-
growth styles also performed relatively well.  The William Blair 
International Growth Fund, for example, had a weekly total return 
of 3.7%.

Hennessy Cornerstone Growth Fund, a core growth fund, gained 2.6% 
last week, highest among "core" stock funds with assets more than 
$500 million.  Heartland Value Fund’s 3.6% weekly return was tops 
among popular "value" funds.  Wasatch Small-Cap Value Fund picked 
up 3.2% for the 5-day period through July 3, 2003.  So, small-cap 
fund returns were broad-based across investment styles.

Fixed Income Fund Group

 Week    YTD    Selected Lipper Fixed Income Indices (Jul-03)
-0.3%   +4.3%   Corporate A-Rated Debt Fund Average
+0.1%   +1.3%   GNMA Fund Average
-0.2%   +8.2%   Global Income Fund Average
-0.1%  +15.7%   High Yield Fund Average 
+0.1%   +8.8%   International Income Fund Average
-0.3%   +4.5%   Intermediate Investment Grade Fund Average
-0.3%   +2.2%   U.S. Government Bond Fund Average


Among U.S. government debt funds with over $500 million in total 
assets, the week’s top performance belonged to Montgomery Short-
Duration Government Bond Fund, up 0.2% over the week.  Vanguard 
Long-Term Treasury Bond Index Fund, on the other hand, lost 0.6% 
over the 5-day period through July 3, 2003.  

FPA New Income Fund, a high-yield fund, produced a 1-week total 
return of 0.5%, highest among U.S. fixed income funds over $500 
million.  T. Rowe Price International Bond Fund gained 0.3% for 
the week, while PIMCO Global Bond Fund was 0.2% higher over the 
most recent weekly period.

Money Market Fund Group

Yield   Selected iMoneyNet Money Market Indices
0.58%   All Taxable MMF Average
0.54%   All Tax-Free MMF Average


The iMoneyNet.com All Taxable MMF Average slid by 6 basis points 
(0.06%) to 0.58% last week following the Fed’s decision a couple 
weeks ago to lower short-term interest rates.  Among prime retail 
money market funds, PayPal Money Market Fund is now the only fund 
with a current 7-day simple yield of 1.00% or more.  It currently 
sports a 1.10% yield.   

Fidelity Cash Reserves, the country’s largest retail money market 
fund, has a 0.88% yield.  Vanguard Prime Money Market Fund sports 
a 0.85% current yield.  With money market yields at all time lows 
some experts are suggesting money market investors check out some 
of the "higher" yields being offered by Internet banks. 


Fund News, Etc.


In Brill.com news (www.brill.com), there was an interesting story 
last week on socially responsible investing, originally published 
by the Fort Worth Star Telegram.  It speaks about the competitive 
returns of SRI funds and growth in fund assets.  Today, about one 
dollar out of every eight is invested in "professionally-managed" 
SRI funds.  Further, combined assets in SRI funds increased about 
36 percent between 1991 and 2001, outpacing the overall growth in 
the mutual fund industry.  Last week, we profiled the co-managers 
of the Women’s Equity Fund, a SRI funds that invests in companies 
that promote women in the workforce.

Morningstar analyst Christopher Davis says the recent Morningstar 
conference in Chicago was more optimistic than two years ago.  On 
the other hand, many attendees have since become more pessimistic 
over the outlook for bonds, with rates historically low and maybe 
moving higher in the second half of 2003 along with U.S. economic 
growth.

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

Trading Terminology

Now that we have developed a system with the five components of 
system development we are ready to move on to the next stage. But 
first let’s do a quick recap of the components.

1. Market Action - I chose the S&P or NASDAQ e-minis because of 
liquidity.

2. Timeframe - I chose 5 minute because it fits my style of 
trading but realize that after testing may have to adjust this, 
however i will not use a timeframe out of my comfort zone.

3. Entering a position -:
      Setup
            5 -minute bar trading under or over the 4MA
      Filter
           ADX(10) >= 30
           DMI(14) (+) > (-) for longs
           DMI(14) (-) > (+) for shorts
      Trigger 
            Next bar trades 1 tick above or below the setup bar.

4. Exiting a position - 
      1/2 the position is taken at a P1 level and 1/2 is taken at 
      P2. 
      Stop at 1 tick above or below the setup bar
      Always exit at the close of the day.

5. Money Management - according to my money management plan.

Now is the time to put our feet to the fire and put the system to 
the test with Tradestation’s Strategy Testing. Tradestation 
describes Strategy Testing as, "a process of designing a set of 
trading rules to systematically enter and exit the market. A 
trading strategy is a complete set of Long and/or Short entry and 
exit rules based on technical analysis. The Strategy Performance 
Report is used to analyze the performance of a strategy as well 
as to gain a better understanding of its characteristics."

Once you apply a strategy to a chart, the Strategy Performance 
Report enables you to view strategy information such as total net 
profit, total number of trades, largest losing trade, and more. 

I will go over some of the some important pieces of data from the 
Strategy Performance Report so we have a basis from which we can 
compare one test to another.

The most important section of the Strategy Performance Report is 
the Performance Summary.

The Performance Summary is divided into three sections, All 
Trades, Long Trades, and Short Trades. This report gives all 
sorts of very good information about your system but these are 
the most important points.

Gross Profit - All the money you made
Gross Loss - All the money you lost
Total Net Profit - Gross Profit - Gross Loss ie. The money you 
walked away with.
Profit Factor - The dollar amount the strategy made for every 
dollar it lost
Number of Trades - Number of trades generated by the strategy for 
the defined time frame
Winning Trades - Profitable trades
Losing Trades - Unprofitable trades
Even Trades - Breakeven trades
Percent Profitable - Winning Trades/# of Trades
Average Net Profit - Average amount you made on each trade Net 
Profit/# of trades
Average Winning Trade - Average amount you made on each winning 
trade Average Winning Trades/# of winning trades
Average Losing Trade - Average amount you lost on each losing 
trade Average Losing Trades/# of losing trades
Largest Wining Trade - The most made on 1 trade
Largest Losing Trade - The most lost on 1 trade
Maximum Consecutive Winning Trades - The most winning trades in a 
row.
Maximum Consecutive Losing Trades - The most losing trades in a 
row.
Maximum Drawdown (intraday peak to valley) - is the greatest 
unrealized loss experienced intraday. This number is important to 
determine the minimum account size.
Maximum Trade Drawdown - is the greatest realized loss 
experienced from closed trades

There is a lot more information on these reports but we have 
enough here to do a fairly good job of evaluation. So what to 
look for?

First of all the most important number is your Profit Factor, if 
you lose more than you make then you don’t have to go any further 
an this number.

Second look at the Percent Profitable. You can make a positive 
Profit Factor and still have the % Profitable less than 50. 
However, this means you have more losers than winners but your 
winners have a larger Average/Winning trade than the 
Average/Losing Trade. This would be a very difficult strategy for 
me from the psychological point of view. I don’t know if I could 
stick with a strategy where I lost more than I won, no matter how 
much my winners made.

Once you have gotten past these two numbers the next piece of 
information to look at is the Average Net Profit or the average 
money made per trade. This number can "normalize’ the first two 
and give you a little clearer picture.

And of course you have to look at the drawdown because this fits 
with your money management plan.

I have my ADX system coded into Tradestation and I would like to 
show you the results for the last 7 months on the S&P e-minis and 
then start an optimization process to see if we can improve a 
system with which we are already comfortable trading.

Where does one start? Here is how I would like to approach this. 
Group the variables into two, one with the money management 
parameters only and one with the technical analysis parameters 
only. The money management group includes; P1, P2 and number of 
ticks away from the setup bar for entry and stop loss The 
technical analysis parameters group includes; ADX length and 
minimum, DMI length, MA length. I did not test the system without 
EXITONCLOSE because I am not comfortable with holding overnight.

I have created a spreadsheet with these criteria and will use the 
Profit Factor and Win/Loss Ratio for comparison. 

Here is the spreadsheet I created.


 


The first line is the results of the system as is and at first 
glance looks like it is not all that profitable. It will only 
return $0.69 for every dollar lost and has only a 40% win/loss 
ratio. My impression was that I had a pretty good system that, 
although it didn’t trade all that often, was profitable. So much 
for my impressions.

Let’s dig a little deeper and examine this data. 

1. Tests 1 through 9 are done with P1 and P2 set at 2 and 4 
respectively. I only changed the Entry and Exit ticks. 

2. Line 8 shows the "best" combination of Enter 3 ticks above or 
below the setup bar and set your stop loss 2 ticks above or below 
the setup bar. 

3. Then for tests 10 through 17 I used the best combination from 
the previous set of tests - Entry ticks = 3 and Exit ticks = 2 
and only made changes to the P1 and P2 points. Here I found that 
P1 = 3 and P2 = 4 seemed to garner the best results. 

4. I then went back and retested the Entry and Exit points with 
the new P1 and P2 in tests 18 to 25. 

The highest Profit Factor and Win/Loss Ratio was $0.89 and 52% so 
I will use P1=3, P2=4, Entry ticks=3 and Exit ticks=2 for the 
second group of tests on the technical indicators. 

To test the Technical indicators I will use the Optimize function 
built into Tradestation. 



 

The number in magenta shows the number the optimization tests 
returned.

Test 1 - Optimize the MA from 2 - 15. This means test all MAs 
from 2 to 15 while the other parameters stay even.

Test 2 - Optimize the ADX Length from 5-15. This means test all 
ADX Lengths from 5 to 15 while  the other parameters stay even.

Test 3 - Optimize the ADX Minimum from 15-45. This means test all 
ADX Minimums from 15 to 45 while the other parameters stay even.

Test 4 - Optimize the DMI Length from 7 - 21. This means test all 
DMI lengths from 7 to 21 while the other parameters stay even.

For the rest of the re-optimization the MA will be set at 11 
because it gave us the best results. Start the optimization 
process over again beginning with ADX Length.

Test 5 - Re-optimize ADX Length.

Test 6 - Re-optimize ADX Minimum. 

Test 7 - Re-optimize DMI Length. 

For the rest of the re-optimization the ADX minimum will be set 
at 33 because it gave us the best results. Start the optimization 
process over again beginning with ADX Length.

Test 8 - Re-optimize ADX Length.

Test 9 - Re-optimize DMI Length. 

For the rest of the re-optimization the ADX Length will be set at 
14 because it gave us the best results. Start the optimization 
process over again beginning with DMI Length.

Test 10 - Re-optimize DMI Length. 

So the final result is:

MA Length         =   11
ADX Minimum       =   33
ADX Length        =   14
DMI Length        =   21
P1 profits        =    3
P2 Profits        =    4
Enter ticks       =    3
Exit ticks        =    2

And here is the Performance Summary for these settings;


 

With the definitions earlier in the article, you should be able 
to come up with a pretty good idea if this system is for you. 
However, I will be delving into this strategy report in greater 
detail but not here. This is enough for one day.

We still have to retest the money management data with the new 
indicator settings and we have to go through this all over again 
for NQ.

I would like to make one last point here about strategy testing. 
A strategy should be robust to be used in different markets but I 
have decided that this strategy will be used for only the S&P or 
the NASDAQ so, although I agree with a robustness, I don’t feel 
it applies here.

Hope this is all helping.

Jane


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

Position Adjustment – Releasing The Choke Hold on the QQQs

By Mike Parnos, Investing With Attitude

Today we’re going to publish our first CPTI "position adjustment."   
Since my column normally appears on Thursdays and Sundays, we 
often miss opportunities to inform our readers of adjustments made 
to positions in our published CPTI portfolio.

Today’s adjustment is to our QQQ Baby Strangle.  Here’s a 
description of the original trade.

July Position #4 – Ongoing QQQ ITM Baby Strangle – Currently at
 $31.87
In May we bought 10 contracts of the July QQQ $30 puts @ $2.05 and 
bought 10 contracts of the July QQQ $28 calls @ $1.80
Total debit of $3.85.

Our thinking:  The QQQs had made a big move up.  It was either 
going to break through resistance or bounce off and head back 
down.  Our objective is for a $3-4 move in the next month.  One of 
our long options will hopefully pay for almost the entire 
position.  That will leave our other long option, which is now 
practically free, poised for the bounce back as the QQQs reverse.  
Our exposure is only $1.85 because we have $2.00 of intrinsic 
value.

Our Adjustment
Today we got the move we were looking for.  The QQQs, along with 
the rest of the market, took off and never looked back (but it 
will, hopefully).  We sold the July $28 call at $3.80.  That means 
we still own the July $30 put at a cost of only $.05.  Now, we 
still have seven trading days for it to reverse and head back 
down.  Wouldn’t it be nice to see the market give back three 
points?  Since the market is going up for no apparent reason, it 
makes sense that it will come back down for the same lack of 
reason.  It’s that "random walk" or "chaos" thing playing itself 
out.  Basically, we have a free trade and seven days to enjoy, and 
hopefully profit from, it.  

An Alternative
Today (Monday), the July $28 call closed at $3.80.  You can play 
the described strategy, or you can hold onto the $28 call.   If 
the QQQs continue up, you should make out very well.  A reverse 
would benefit those who follow the strategy as designed.

The July $30 put finished with a value of $.15.  If you sold it, 
along with the $28 call, you would have a profit of $.10.  But 
that’s no fun. 

You could just sell the July $30 put and have a small cushion 
should the QQQs pull back a little before a continued climb up.

Decisions, Decisions . . .
What will YOU do?  As they say in the Far East – Rotsa’ Ruck!
________________________________________________________________

P.S.  It looks like, as of about 4:30 p.m., the QQQs are bidding 
up a little.  There may be a little pop at the open tomorrow – if 
bad news doesn’t come up to damper the buying.
________________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have 
questions about our plays or our strategies?  Feel free to email 
me your questions.  An excellent source for new students is the 
OptionInvestor archives where we’ve been discussing strategies and 
answering questions since last July.  To find past CPTI (Mike 
Parnos) articles, look under
"Education" and click on "Traders Corner."  They’re waiting for 
you 24/7
______________________________________________________________

Happy trading! Remember the CPTI credo: May our remote batteries 
and self-discipline last forever, but mierde happens. Be prepared! 
In trading, as in life, it’s not the cards we’re dealt. It’s how 
we play them.

Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP


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The Option Investor Newsletter                   Monday 07-07-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: ABC, AGN, AMGN, DGX, GS, HAR, PHM, EBAY
Dropped Calls: STJ
Dropped Puts: COF
Play of the Day: Call - AMGN
Watch List: Would you believe more breakouts?

Updated on the site tonight:
Market Posture: Bears Roast in the Hot July Sun


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

ABC - call
Adjust from $68.50 up to $69.95

AGN - call
Adjust from $76.00 up to $77.50

AMGN - call
Adjust from $63.50 up to $64.75

EBAY - call

DGX - call
Adjust from $63.50 up to $64.00

GS - call
Adjust from $81.95 up to $83.25

HAR - call
Adjust from $76.50 up to $77.25

PHM - call
Adjust from $59.99 up to $60.50

eBay Inc - EBAY - close: 113.91 change: +3.89 stop: 109.00*new*

Shares of EBAY have continued to rally strongly and given the
3.44 percent jump in the NASDAQ composite we're not surprised. 
Shorts could be on the run after EBAY failed to stall at the 
$110 level.  Our secondary target of $120 doesn't seem too far
away but we caution against initiating new bullish positions 
as the stock is short-term overbought from its $104 breakout.
Traders with profitable positions should re-evaluate their 
stop losses to ensure a profit if the stock reverses.  They're 
also highly encouraged to consider taking some money off the table
now.  It never hurts to take a profit and pocket some cash.  We're 
upping our stop loss to $109.00 on the stock but traders are 
strongly encouraged to make their stops tighter to protect gains.
Currently, we plan on riding EBAY into its earnings report (and
dumping it just before hand) unless shares hit $120 or stop us
out in profit taking.

Picked on June 27th at $104.05
Change since picked:     +9.86
Earnings Date         07/18/03 (unconfirmed)
Average Daily Volume =    6.76 million



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

St. Jude Medical - STJ - close: 55.64 change: -0.86 stop: 54.95

Well, it certainly appears the rising tide isn't lifting all 
boats, as the stock underperformed most of its peers again on 
Monday, as well as the broad baskets of healthcare-related stocks.  
Traders looking for the reason are going to be led to the SG Cowen 
downgrade to Outperform this morning.  That took the bloom off 
this rose and a possible rebound from the $56 area turned into a 
breakdown instead.  STJ has now broken below the bottom of its 
ascending channel and the 50-dma ($56.00) and our stop.  While the 
stock did manage to recover significantly off its lows, this 
rebound looks like an opportunity to get out, not to consider new 
positions.

Picked on June 24th at   $57.62
Change since picked:      -1.98
Earnings Date          07/16/03 (confirmed)
Average Daily Volume = 1.60 mln



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

Capital One Fin. - COF - close: 51.13 change: +1.88 stop: 50.51

The 2-week stalemate finally broke on Monday, with shares of COF 
getting enough of a bid from the overall Financial sector to break 
out over $50 resistance, our $50.51 stop and then the 20-dma 
($51.13).  While the stock is still significantly underperforming 
its peers, this bullish tide is indeed lifting all boats and it is 
time to bid a bon voyage to COF.  Given its relative 
underperformance recently, odds are good that it will provide 
further bearish opportunities once this rally fades.  But fighting 
the bullish trend right now is not a prudent use of resources.  
For traders that didn't exit today, we'd recommend using any dip 
early on Tuesday as a gift of an exit point.

Picked on June 15th at   $49.64
Change since picked:      +1.49
Earnings Date          07/16/03 (confirmed)
Average Daily Volume = 4.18 mln




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

Amgen, Inc. - AMGN - close: 68.91 change: +2.53 stop: 64.75*new*

Company Description:
The biggest of the Biotech big guns, AMGN makes and markets 
therapeutic products for hematology, oncology, bone and 
inflammatory disorders, as well as neuroendocrine and 
neurodegenerative diseases.  Anti-anemia drug Epogen and immune 
system stimulator Neupogen account for about 95% of sales.  Its 
Infergen has been commercialized as a treatment for hepatitis C, 
and Stemgen is approved for stem cell therapy in Australia, 
Canada, and New Zealand.  The company has a strong pipeline of new 
drugs in various stages of development as well as research and 
marketing alliances with Hoffman-La-Roche and Johnson & Johnson.

Why we like it:
While it would have been nice to see our AMGN play end the week at 
a new high, we certainly won't complain about the stock's 
consistency.  Each dip near the 30-dma (currently $64.56), which 
is also near both the long-term ascending trendline and the bottom 
of the 2-month channel.  Seems like pretty strong support, don't 
you think?  Unfortunately, resistance was just as strong last 
week, as AMGN challenged the $67.50 resistance level (6/16 high) 
on 3 out of 4 days and each time the bears turned the stock back.  
A successful breakout over $67.50 next week may make for a decent 
momentum entry enroute to the $70 level, but remember this is a 
very aggressive strategy with AMGN.  The stock doesn't tend to 
have good follow-through on the breakouts, with the better entries 
coming on the pullback to support following the breakout.  While 
it was disappointing to see AMGN fall back near the $66.50 level 
at the close (note the closing price of $66.06 took place after 
hours), this just looks like more of the back and forth tango that 
we've become familiar with when trading AMGN.  It doesn't tend to 
trend very well on a day-to-day basis, but over the longer-term it 
continues to build a consistent pattern of higher lows and higher 
highs.  Posting a lower high last week could be a precursor of 
more weakness in the week ahead, as we could be setting up for a 
repeat of the bearish pattern that developed in late April and 
early May.  In that time period, the stock traded two significant 
lower highs and lower lows before once again finding strong 
support at the 50-dma.  So while we're looking for new entries 
near the $64.50-64.75 area, we need to keep in mind that it is 
possible for AMGN to trade down to the area of the 50-dma ($63.52) 
and still retain its longer-term uptrend.  Aggressive traders 
looking for a bargain and willing to try to catch the bottom of 
the next sharp selloff may do well to target a rebound from the 
$63.75-64.00 area.  We'll continue to follow the 50-dma higher 
with our trailing stop, which now moves to $63.50.

Why This is our Play of the Day
With the broad market steaming full-bull ahead right from the open 
on Monday and the Biotechs surging higher to the tune of 3.44% by 
the close, it comes as no surprise that our AMGN play managed to 
break out over its mid-June high of $67.54.  We didn't really 
expect to see that breakout extend to within less than a dollar of 
our initial $70 target on the same day, but it does fit with the 
pattern.  Look at the past few breakouts in AMGN, most notably 
4/23 and 6/16, although there were several less noticeable 
breakouts in between.  How many of those breakouts led to 
immediate bullish follow-through?  NONE!  Should we be buying this 
breakout?  Not unless you want to buck several months of a price 
trend.  No, this is the point to harvest gains and then go looking 
for another entry into the play AFTER a pullback and rebound from 
support.  Another push up near $70 on Tuesday would make the 
perfect opportunity to harvest gains and then wait for another 
entry point near the 20-dma, currently $65.42.  While we're 
willing to tighten our stop somewhat this evening to $64.75 (just 
under the 30-dma), we don't want to get too aggressive, as we 
still have our eye on a $72 price target.  A trade at that level 
should be used as a hard exit, regardless of entry. More 
conservative traders may want to be more aggressive with their 
stops at this point -- just under Thursday's $65.94 low is one 
alternative.

Suggested Options:
Shorter Term: The July 65 Call will offer short-term traders the 
best return on an immediate move, as it is currently in the money.

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the August 70 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 August 65 call.

BUY CALL JUL-65 YAA-GM OI=31309 at $4.20 SL=2.50
BUY CALL JUL-70 YAA-GN OI=17309 at $0.80 SL=0.40
BUY CALL AUG-65 YAA-HM OI= 4657 at $5.20 SL=3.25
BUY CALL AUG-70 YAA-HN OI=10389 at $1.95 SL=1.00

Annotated Chart of AMGN:


 

Picked on June 24th at     $65.05
Change since picked:        +3.86
Earnings Date             07/22/03 (confirmed)
Average Daily Volume =   10.2 mln


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

Would you believe more breakouts?

Microsoft - MSFT - close: 27.42 change: +0.92

WHAT TO WATCH: A story from a French paper cited unnamed sources 
and the potential for MSFT to grant a one-time $10 billion 
dividend.  The stock added 3.47% while hitting the top of the 
NASDAQ's most active list.  The stock has broken above recent 
resistance at $27.00 and could see a run to the $30 level ahead 
of its July 17th earnings announcement.

Chart=


---

Cabot Microelectronics - CCMP - close: 55.64 change: +3.45

WHAT TO WATCH: Shares of CCMP have broken out of their recent 
consolidation pattern and the close today is just below its old 
highs from January 2003.  Many suspect the extreme bullishness in 
the markets and the high-volume breakout in CCMP today has shorts 
in a squeeze.  This stock has a very high short interest and a 
move above $56.00 could exacerbate it.  Should the breakout 
occur, we'd target a move to $62.50.

Chart=


---

Agilent Technologies - A - close: 21.29 change: +1.30

WHAT TO WATCH: The rally in tech produced a strong day for 
Agilent.  Shares added 6.5% on strong volume of 4.2 million 
shares.  This is almost a new 52-week high and marks a strong 
close over overhead resistance.  Shorts could be on the run and 
trying to cover.

Chart=


---

Merrill Lynch - MER - close: 50.70 change: +1.45

WHAT TO WATCH: Some positive comments about MWD and some investor 
follow through on the positive court decisions in favor of MER 
last week have the stock hitting new highs today.  Shares broke 
over the key $50 level (daily and weekly resistance) on strong 
volume of 9.49 million shares.  We wouldn't be surprised to see 
the bullish momentum carry into its July 16th earnings report.

Chart=


---

Sun Microsystems - SUNW - close: 5.09 change: +0.34

WHAT TO WATCH: SUNW is still a little cheap to play options on 
but its recent action is worth mentioning.  The daily chart is 
showing a nice bounce from its rising 50-dma a few days ago, 
which coincided with price support at the $4.50 level.  MACD is 
about to turn bullish again while daily stochastics, RSI and 
Momentum are already doing so.  The move over $5.00 looks 
tempting for an aggressive player.  Next resistance is $5.50-5.60 
but given the trend one might consider targeting the $6.00 area.

Chart=




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

PIXR $63.40 - Today's 3.1% move produced a fresh triple-top 
breakout on PIXR's point-and-figure chart while also setting new 
one-year highs.  The stock is quickly approaching all-time highs 
set in 1998.

VRSN $13.88 - The 4% gain today has broken VRSN's recent bull 
flag pattern but left shares directly below price resistance at 
$15.00.  Bullish traders could use a move over $15 to trigger 
them into a play.  While there is current resistance at $16.00, 
we could target a move to $17.50.  VRSN's MACD is about to 
produce a bullish buy signal from oversold.

DELL $33.08 - Another big tech heavyweight, DELL broke out to new 
52-week highs today before slipping back into the close.  The 
longer-term trend from February is nice and bullish but the stock 
moves rather slowly for directional option traders.

IACI $42.74 - Previously known as USAI, the stock has been very 
strong after bouncing at the $35 level last week.  One to watch.

SMG $54.00 - Oh the horror!  We came so close to adding SMG to 
the play list as a long this weekend.  The Thursday close over 
resistance at $50 and its 200-dma looked very inviting.  Looks 
like we weren't the only ones who thought so.

VARI $36.50 - Breakout to new highs on strong volume could have 
traders looking for $40.00 soon.

KRON $56.58 - This is a software stock that has seen a ton of 
strong volume on its recent breakout over $50.00.  We're still 
waiting for a decent pull back. 


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

Bears Roast in the Hot July Sun

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