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Daily Newsletter, Monday, 07/28/2003

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The Option Investor Newsletter                   Monday 07-28-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Stage Was Set, but the Anticipated Act Failed to
Materialize
Futures Wrap: Squeezing the flats
Index Trader Wrap: See Note
Weekly Fund Wrap: Dollar Weakness Sends Gold Mutuals Higher


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     07-28-2003         High     Low     Volume Advance/Decline
DJIA     9266.51 - 18.06  9303.83  9234.50 1.59 bln    778/ 764
NASDAQ   1735.36 +  4.66  1740.59  1726.24 1.52 bln    878/ 561
S&P 100   501.49 -  1.45   504.18   500.19   Totals   1656/1325
S&P 500   996.52 -  2.16  1000.68   993.59
RUS 2000  473.83 +  4.95   474.42   468.88
DJ TRANS 2622.80 +  7.01  2628.94  2607.75
VIX        19.93 -  0.01    20.43    19.74
VXN        30.40 +  0.36    30.93    30.04
Total Volume 3,317M
Total UpVol  1,797M
Total DnVol  1,403M
52wk Highs     561
52wk Lows       51
TRIN          0.82
PUT/CALL      0.68
*******************************************************************

The Stage Was Set, but the Anticipated Act Failed to Materialize

Foreign bourses set the stage for a strong Monday performance on
U.S. markets.  Asian markets took the stage first, with the Nikkei
leaping up almost 100 points on its open and then closing up
191.90 points at 9839.91.  That proved to be its highest close
since July 10 when the Nikkei last closed over 9900.  The Nikkei
built upon the strong performance of the U.S. markets Friday
afternoon, but market participants also celebrated after Japanese
microchip testing equipment maker Advantest reported its first
profit in eight quarters.  Advantest's management also mentioned
expectations for rising orders, a statement that cheered investors
and raised hopes for economic recovery.

Europe's markets then took the stage, with Asia's warm-up act
readying participants for more good news.  That good news came in
the form of Germany's closely watched Ifo business climate
indicator, which rose to 89.2 from June's 88.8.  By the time U.S.
investors woke this morning, European markets were surging.

Yet our S&P futures showed a surprisingly lackluster performance
in their warm-up to the U.S. open.  They had tested but failed to
hold over 1000 in the overnight session.  Something was wrong.
With all these warm-up acts preparing the stage, was our rally
going to be a no-show?

CNBC did its part in warming up the audience.  Before the markets
opened, Maria noted statistics that showed U.S. markets prepped
for continued gains.  Those statistics included information on
IPO's and M&A activity, with the notation that M&A activity has
been the busiest in a year.  Analysts tried to warm up the crowd.
Prudential's chief investment strategist urged increasing equity
allocations to 80 percent from 70 percent and also recommended
reducing bond and cash allocations.  This strategist believes the
S&P 500 could gain another 20 percent according to one report.
CIBC chimed in, too, with its chief investment strategist saying
the U.S. economy was in the early-to-middle phase of a recovery
that will be supported by earnings.

Earnings reports before the bell included defense company Northrop
Grumman (NOC), copier behemoth Xerox (XRX), Kellogg (K), health
insurer Humana (HUM), and BMC Software (BMC).  XRX's profit
actually slipped and BMC posted a loss and forecast Q2 revenue
that will be lower than the previous consensus, according to one
report.  Still, the crowd prompters characterized all their
earnings as beating expectations.

Yet S&P futures still weren't climbing over 1000.  Bonds did their
part, bowing out and letting equities take center stage.  Yields
were up significantly in premarket.  Even with all that prompting
and with the stage perfectly set, the SPX opened only at 999.  It
quickly tested 1000, rising as high as 1000.68.  This act's
reception proved tepid, however, and the SPX just as quickly
retreated.  As it turned out, the SPX had already achieved its
climatic act of the day, never again touching that day's high. At
the time that day's high was achieved, the SPX also tested a
descending trendline off the June highs.  The day's action formed
a small-bodied candle that just missed being a doji.

Daily Chart of the SPX:




Although today's action saw the SPX turning down from the
descending trendline that's been capping prices since the middle
of June, we should remember that it's possible to draw another
version of this trendline, one that includes the June 14 intraday
high.  That trendline has not yet been challenged.  Still, today's
action implies some hesitancy in driving the SPX above the current
version of the descending trendline.  That descending trendline
now coincides with the resistance now offered by the blue
regression channel.

What do we know after studying this chart?  We know that the SPX
still trades within a consolidation or continuation pattern
defined by that descending top trendline and either the horizontal
support at 975-976 or the rising red trendline marked on the
chart.  One formation has bearish implications while the other is
neutral.  We know that the low ADX number shows that the previous
trend--the rally--continues to lose strength.  We know that MACD
has flattened, as it often does during consolidation.  We can see
that RSI generally maintains its pattern of lower highs, although
Friday had seen RSI bump slightly above its own descending
trendline.  We know that the 21(3)3 stochastics have maintained
their series of higher lows.

We know precious little.  The SPX consolidates:  that's what we
know.  Market participants wait in their seats, ready to leave the
theater or cheer the performance.  It's up to the markets now, and
we must wait until those consolidation or continuation patterns
are broken either to the upside or downside.

Fortunately, the ascending supporting trendline has risen to
intercept the horizontal supporting line, so that we no longer
have to question which line is most important or whether the
bearish or neutral formation appears more valid.  A downside
violation of one will now be a downside violation of the other.
Any such downside violation, especially on a closing basis, would
suggest another test of the 25 percent rally retracement near the
982 level that marked the July 1 low, if not a move to the 38.2
percent retracement near 928-930.

An upside violation of the descending trendline is likely to push
the SPX back into its ascending regression channel, suggesting a
test of the previous SPX highs, if not of the rising midline
resistance.  Today's candle hints that we'll see a test of
downside support before we witness an upside breakout, but there's
nothing on the indicators that reliably confirms the potential
reversal signal given by the daily candle.  Since the SPX again
closed above its 21-dma, we must juggle this sign of strength
against the daily candle's hint of weakness.

As is often true, the OEX daily chart shows many of the same
formations.

Daily Chart of the OEX:





The OEX daily chart sports a small-bodied red candle sitting near
the top of the previous day's big white candle, a potential
reversal signal.  The candle's upper shadow tested but could not
move above resistance marked on the chart.  As with the SPX, both
versions of the bottom supporting red trendlines now coincide, so
that a downside violation of one will be a downside violation of
both.

Today's candle's shape and position suggest a test of support
before an upside breakout, but as with the SPX, indicators show
mixed evidence.  They don't reliably corroborate the potential
reversal.  That potential reversal signal is also undercut by its
occurrence during consolidation rather than at the top of the
rally.  Even if tomorrow's trading results in a red candle that
confirms the potential reversal signal, that reversal could hold
for only a day or two.  If those intersecting supporting
trendlines are violated to the downside, this suggests a test of
the 25 percent rally retracement at the July 1 low near 484 or
perhaps even a test of the 38.2 percent retracement.

As with the SPX, an upside break suggests a test of previous
recent highs.  Like the SPX, the OEX again closed above its 21-
dma.

On Friday, the Dow Jones Industrials broke out above the top of
its descending trendline.  Today's candle questions that breakout,
however.

Daily Chart of the DJX, as a proxy for DJI:




Like the two S&P's, today's DJX candle was a near-doji printed at
the top of the previous day's big white candle.  This would be a
potential reversal signal if it came after a sustained upward
movement, but has less significance when it comes during
consolidation.  It still might portend at least a day or two's
reversal, enough to push the DJX back into its consolidation
pattern.  It might be easier to argue, too, that the DJX has been
in an uptrend since early July, forming a pattern of higher highs
and higher lows, so perhaps this formation has more significance
than it did for the two S&P's.

As with the S&P's, nothing on the indicators signals conclusive
evidence of anything but the facts we already know:  this market
has been consolidating.  The DJX has seen a minor breakout above
its descending trendline, but perhaps not a convincing breakout.
It, like the other two markets already discussed, may be signaling
a need for at least one more trip down toward support.

Throwing that conclusion into doubt, however, is the recent
performance of the Dow Jones Industrial's sister index, the TRAN.
The TRAN has been achieving a series of higher highs and today
closed over 2600 for the first time since early July 2000.  The
TRAN often leads its sister index, suggesting that perhaps the
DJI's upside breakout was real.  If it's not, and if the DJI does
not hold onto gains and then best its June highs, we may be seeing
divergence between the two indices, a bearish sign.

Despite the DJX's possible upside breakout above the descending
trendline, the NDX's daily chart looks the most bullish of the
indices depicted in this article.

Daily chart of the NDX:




The NDX still maintains its ascending regression channel.  Instead
of squiggling around between 50 and 60, the RSI pulses up and down
in a normal manner. It's been pulsing upward over the last week as
the NDX traveled up to test resistance.  That resistance consists
of the midline resistance of its regression channel as well as the
resistance implied by a possible bull flag.

Today's candle was a doji, indicating indecision and creating a
possible reversal signal that requires completion by tomorrow's
action.  As with the other indices, this possible reversal signal
forms within a consolidation band, and so might not be as
significant as it would be if it had formed at the top of a
sustained upward movement.

Oscillators give mixed messages with stochastics still cycling up
but with ADX easing further, indicating a further weakening of the
former trend.  That sometimes happens with bull flag formations,
so we can't give that easing of the ADX too much weight just yet.
However, in late June, at about the same time that ADX began
descending, MACD broke below its pattern of higher lows, perhaps
also a confirmation of impending weakness.  RSI and stochastics
tops have been showing bearish divergence with the price highs,
too.  That's been going on some time, however, without higher
price highs being impacted, so we can't and shouldn't make our
trading decisions on this information alone.  Those divergences
should, however, make us cautious.

Developments during the day and after hours didn't seem to affect
market participants strongly, either, giving few clues as to
market direction.  Citigroup (C) and JP Morgan (JPM) ended flat
today after reaching a settlement with the SEC over the
investigation into Enron-related charges.  After-hours releases
included earnings announcements from Sprint (FON) and Barrick Gold
(ABX).  Excluding onetime costs and gains, FON earned a better-
than-expected 35 cents per share, two cents ahead of expectations
and four cents ahead of year-ago levels.  Sales fell 8 percent
from the year-ago period.  Meeting expectations, the PCS unit lost
9 cents a share, up from its 17-cent loss in the year-ago period,
while adding more customers than expected.  Sales rose in the PCS
unit.  At 11 cents per share, ABX's Q2 income matched that of last
year's second quarter, beating expectations for 6 cents per year.
It seems unlikely that these announcements will guide the markets
one direction or the other.

Nor is it likely that tomorrow's economic releases will tell us
much.  Tomorrow's economic release includes only July consumer
confidence, due at 10 am ET, with a market consensus of 85, up
from June's 83.5. As Jim noted this weekend in his Wrap, this
consumer confidence number compiled by the Conference Board does
not normally move the markets.  Economists consider small changes
in the number to be noise, with one source noting that only a
change of 5 points or more would be considered significant.  Two
components compose this number:  the expectations component and
the current conditions component.  The expectations component
composes 60 percent and is considered a better leading indicator.

It's not until later in the week that economic releases heat up
again.  Let's hope we're not doomed to endure another day or two
of no-show market performances until then.

Linda Piazza


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

Squeezing the flats
Jonathan Levinson

Todays session brought treasury bonds to new year lows, the HUI
to a five year high, and held equities in a tight range near what
is either a lower high distribution zone, or a consolidation for
an assault on the year high.  The session made it nearly
irresistible to either go long or short at various points,
squeezing the flats.


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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U     1004    999    995    990    986
YM03U     9316   9273   9240   9197   9164
NQ03U     1297   1290   1282   1275   1267


10 minute chart of the US Dollar Index




The US Dollar Index spent the day chopping its way back toward
overnight support at the 95 level.  The Fed added a net 2.75B via
overnight repo in the amount of 5.25B against 2.5B expiring.
This action from the Fed should have helped support the US Dollar
Index and put a bid into treasury bonds, but neither occurred, as
news of the $126B expected sale of treasury bonds in Q4
(September-December) 2003 circulated the wires.  The action was
bullish for the CRB, gold, silver and the precious metals indices
in the early session, with a pullback coming in the afternoon.


Daily chart of August gold




August gold took another rocket ride today, touching 367.60
before pulling back to close at 364.60.  This so far
correctionless move has left us with a gravestone doji on the
daily candles, portending a correction of the recent huge gains.
The precious metals indices started out very strong but pulled
back, the HUI closing down .55 to 166.48 and the XAU –1.21 to
83.06.

Daily chart of the ten year note yield




No rest for the weary as the ten year note yield set new year
highs today, adding 10.6 basis points to close at 4.284%.  The
FVX added 12.2 bps, and the thirty added 10 to close at 5.218%.
The drain in bonds did not benefit equities, which treaded water
throughout the session, but it didn't hurt them either as we
might otherwise have expected based on the liquidity theory.


Daily NQ candles




Did the Nasdaq futures print a shooting star today?  Or was it a
consolidation of the big gains from Friday's "we got Saddam,
again" rally?  The market couldn't decide, and this indecision
printed a nearly flat close with spikes both to the upside and
down.

30 minute 20 day chart of the NQ




On a closer examination, we get no closer to an answer, as the NQ
drifted sideways through upside resistance on the pennant we
discussed in this weekend's Futures Wrap.  However, a breakout
implies explosive volume, panicking shorts, an MTV-Spring-Break
extravaganza at CNBC, etc., none of which occurred today.  The NQ
printed a higher high and higher low, but only added 3 points to
Friday's close.

Daily ES candles




The S&P futures managed to drop half a point in today's session,
higher high and higher low.  The longer oscillators are close to
buy signals, but the signal is often the precise point of
rejection on a reversal move, and so we've learned not to
anticipate.  For the moment, the downphase is sputtering, but
still intact.

20 day 30 minute chart of the ES




The pennant breakout just moved sideways again, still no
explosion to the upside, although many participants caught their
breath last night and this morning as the ES cleared 1000
briefly.


150-Tick ES




Zooming in on the 150-tick chart of the ES, today's range and my
effort to follow it are plainly visible.  There were no volume
spikes exceeding 10,000 contracts, and the entire day was good
for just under 7 points' range.


Daily YM candles





Same story for the YM contract as the ES, except that today's 22
point loss was insufficient to reverse the buy signals printing
lazily on the daily oscillator and against which the short cycles
(below) are current fighting.

20 day 30 minute chart of the YM




Today's session just ran the clock, as existing trends continued
on all but the equity futures.  Gold and silver moved higher,
bonds moved lower, equities went nowhere.  The 150-tick ES chart
above shows that the drops were on higher volume and moved more
quickly than the advances back up, making the downside moves
appear impulsive to me.  Read that way, I think the range is
going to break to the downside.  The winning strategy today,
either way, was to go short at upper trendline resistance and
long at support, with a one point to two point stop in each case.


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

Dollar Weakness Sends Gold Mutuals Higher

Continued strength in the price of gold, due to weakness in the
dollar, helped international equity funds and gold mutual funds
to finish the week significantly higher.  According to Lipper's
fund indices through July 25, the average gold fund generated a
1-week return of 11.7 percent to pace all objectives, while the
average international equity fund rose 2.2 percent.  U.S. stock
funds gained ground too, but their weekly returns were small in
comparison to international stock funds.





With stocks higher Friday in response to improved U.S. economic
news later in the week, the S&P 500 large-cap index gained 0.5%
for the week.  Most U.S. diversified stock funds kept pace with
the market benchmark.  With tech stocks up overall for the week,
growth-driven funds outperformed other equity management styles,
averaging more than 1.0% for the week.  Conservative stock fund
objectives, such as balanced funds and equity income funds, had
weekly total returns of 0.5% or less.

With the U.S. dollar weaker and gold prices stronger last week,
international stock funds produced weekly total returns of 2.2%
on average per Lipper.  However, the average foreign stock fund
returned less than the MSCI EAFE index benchmark, which climbed
3.0% for the week using Vanguard's developed-markets index fund
as the benchmark.  Emerging-market returns were generally under
2.0% for the week.  Gold funds stole the show, however, gaining
11.7% on average last week.

Bond indices were lower for the week, with income investors now
more worried about the negative effect of rising interest rates.

Short-term bonds lost just 0.1% on the week, while intermediate-
term bonds fell 1.0% on average and long-term bonds tumbled 1.9%
on average, using Vanguard's bond index funds as the benchmarks.
The total U.S. bond market as measured by the LB Aggregate Bond
index declined 0.6% for the week, using the Vanguard Total Bond
Market Index Fund as the benchmark.  Bond mutual funds followed
suit, with weekly declines greater as you moved out in duration
and maturity.

U.S. dollar weakness contributed to the strong relative returns
of global/international bond funds last week.  Lipper's numbers
show that the average global fixed income fund returned 0.7% in
the last five days, while the average international income fund
finished the week higher by 1.5 percent.

Equity Fund Group

 Week    YTD    Selected Lipper Equity Indices (Jul-25)
+0.3%  +10.1%   Balanced Fund Average
+0.6%  +11.4%   Equity Income Fund Average
+2.2%  +13.0%   International Fund Average
+0.5%  +12.7%   U.S. Large-Cap (Core) Fund Average
+0.6%  +17.4%   U.S. Mid-Cap (Core) Fund Average
+0.8%  +18.8%   U.S. Small-Cap (Core) Fund Average
+0.6%  +16.1%   U.S. Multi-Cap (Core) Fund Average
+1.2%  +29.1%   Science & Technology Fund Average


Last week's highest performers were gold mutual funds, which on
average rose 11.7 percent, per Lipper.  Among funds with assets
greater than $500 million, Fidelity's Select Gold Portfolio was
the week's top performing fund, rising 12.2% for the week.  The
$571 million fund is the largest in the gold fund category, per
Morningstar.  Some funds in the category returned as much as 19
percent for the week, however.

International stock funds produced strong absolute and relative
returns last week also, with both gold and foreign stock prices
the beneficiaries of dollar weakness.  Among $500 million funds,
T. Rowe Price's European Stock Fund had a 1-week return of 3.2%,
while the JPMorgan Select International Fund returned 3.3% over
the 5-day period.  Delaware Pooled Trust's International Equity
Portfolio produced a 3.4% weekly total return.  Several more in
the category returned over 2.5% for the week.

Among U.S. diversified stock funds, the week's strongest return
performances came from "growth" oriented funds.  Among funds in
excess of $500 million in net assets, Oak Associates' White Oak
Growth Stock Fund returned 2.4% for the week, while TCW Galileo:
Select Equity Fund had a 2.3% weekly return.  Two RS (Robertson
Stephens) funds performed well also: RS Diversified Growth Fund
(+2.2%) and RS Emerging Growth Fund (+2.1%).  Several more pro-
growth style funds had 1-week returns of over 1.5 percent using
Lipper's numbers.

Fixed Income Fund Group

 Week    YTD    Selected Lipper Fixed Income Indices (Jul-25)
-0.7%   +2.6%   Corporate A-Rated Debt Fund Average
-0.4%   +0.4%   GNMA Fund Average
+0.7%   +7.1%   Global Fixed Income Fund Average
-0.3%  +16.3%   High Yield Fund Average
+1.5%   +8.3%   International Fixed Income Fund Average
-0.6%   +3.0%   Intermediate Investment-Grade Fund Average
-0.1%   +1.8%   Short Investment-Grade Fund Average
-0.7%   +0.3%   U.S. Government Bond Fund Average


While a few short-term bond funds eked out tiny gains last week,
most U.S. investment-grade and high-yield funds sustained weekly
losses.  According to Lipper, U.S. government and corporate bond
funds lost as much as 0.7% over the 5-day period through July 25,
as some analysts are calling an end to the bull market for bonds.

Dollar weakness contributed to the strong performance of non-U.S.
bond funds.  Among funds with over $500 million in assets, SEI's
International Fixed Income Fund was the week's top performer, up
1.9% for the week.  T. Rowe Price International Bond Fund gained
1.6% last week, while American Century's International Bond Fund
finished the week 1.5% higher.

Money Market Fund Group

Yield   Selected iMoneyNet Money Market Indices
0.53%   All Taxable MMF Average
0.34%   All Tax-Free MMF Average


The iMoneyNet.com all-taxable money market fund average slid one
basis point, to 0.53%, last week.  PayPal Money Market Fund (402-
935-7733) remains the nation's top prime-retail money fund, with
a current 7-day simple yield of 1.04%.  No other retail fund has
a current yield over 1.00%.

The country's largest prime-retail fund, Fidelity Cash Reserves
has a current 7-day simple yield of 0.82%, while Vanguard Prime
Money Market Fund, another large, popular fund, stands at 0.81%.
Lower expenses/costs help these two funds to remain competitive.

Fund News, Etc.

Last week, Lehman Brothers Holdings (LEH) announced that it has
entered into a definitive agreement to acquire Neuberger Berman
(NEU) in a transaction valued at around $2.6 billion.  Lehman's
acquisition would bring total client assets under management to
over $100 billion, including Neuberger & Berman's $63.7 million
in assets under management at June 30.  Dalbar, a leading mutual
fund consulting firm, says you can expect more consolidation and
mergers in the financial services and asset management industries
as investors become more optimistic about the market and economy.

Chairman and CEO of Oak Value Capital Management Inc., investment
advisor for the Oak Value Fund (OAKVX), George W. Brumley died in
a plane crash in Kenya the weekend of July 19-20, with all three
members of his immediate family and eight members of his extended
family, including his parents, two sisters and their spouses and
oldest children.  To read the company statement released July 21,
go to (www.oakvaluefund.com).  George Brumley co-managed the $273
million Oak Value Fund since its January 1993 inception, building
a solid long-term track record.  The fund's 10-year rating is "4"
stars from Morningstar, based on above-average return and average
risk relative to category peers (i.e. mid-blend funds).  Fund co-
manager, David Carr, becomes the fund's "sole" portfolio manager.

Brumley and his partner Carr founded Oak Value in 1986 in Durham,
North Carolina, sticking to the value investment philosophies of
Benjamin Graham, one of the fathers of "value" investing.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                   Monday 07-28-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: AZO, GENZ
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - AZO
Watch List: Individual Stocks Rally

Updated on the site tonight:
Market Posture: After Friday's Rally, Traders Sat on the Sidelines


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

AZO - call
Adjust from $77.00 up to $78.50

GENZ - call
Adjust from $46.49 up to $48.00


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

None


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

None


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

AutoZone, Inc. - AZO - close: 82.95 change: +2.78 stop: 78.50

Company Description:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its more
than 2900 stores in 42 states and Mexico carries an extensive
product line for cars, vans and light trucks, including new and
re-manufactured automotive hard parts, maintenance items and
accessories.  Approximately half of its domestic stores also have
a commercial sales program, which provides commercial credit and
prompt delivery of parts and other products to local repair
garages, dealers and service stations.

Why we like it:
You certainly haven't heard much on the topic from Stock TV
lately, but automotive related-stocks look like they might
actually be a beneficiary of the recent rise in interest rates.
If it cuts into consumers' willingness to take on the payment for
a new car, that means they'll need parts and service for their
existing vehicles, right?  That seems to be what investors are
thinking, as shares of AZO have been gradually working their way
higher over the past few weeks.  There was a fair amount of
indecision around the 200-dma in late June and early July, but the
bulls eventually prevailed, leading to the trend we're seeing on
the daily chart tonight.  The stock has been tracing out a nice
bullish triangle, with higher lows and horizontal resistance in
the $79.50-80.00 area (see chart below).  The bulls were so eager
for a positive conclusion to that pattern that they broke above
the top of that pattern on Friday at the close.  It wasn't just
horizontal resistance that was eliminated either, as the close
over $80 was also a breakout over the 50-dma.

It gets better too, as the PnF chart is on a Buy signal, in a
column of X and has a vertical count of $90.  Can AZO break out to
new highs ahead of its earnings report at the end of August?
Stranger things have certainly happened in the past, but we aren't
going to set our sights quite that high.  Our initial target will
be for a rally to the $85 resistance level and if it really gets
moving, then we may target a trade in the $88 area (very strong
resistance) as our profit exit.  But first we need to get into the
play.  Aggressive traders can use a further breakout over $80.30
(Friday's intraday high) to enter the play, while more patient
dip-buyers can look to enter on a pullback and rebound from either
the 10-dma ($78.82) or the ascending trendline and 20-dma which
are overlapped near $77.75-77.80.  Set stops initially at $77, as
that is just below the low print of last Tuesday's dip.

Why This is our Play of the Day
Whether you gravitate to price or volume action, you've got to
love the start our AZO play got itself off to on Monday.  Despite
bifurcated, directionless chop in the rest of the market, the
stock continued with Friday's technical breakout over the $80
resistance level, surging through $81 shortly after the open and
with only a couple of midday pauses, ran up to end right at the
high of the day, just below $83.  A quick look at the volume
action shows a very healthy pattern with solid volume early in the
day building to a crescendo by the end of the day, leaving the
closing volume number above the ADV and the best showing since
July 10th.  Apparently Friday's breakout over the 50-dma was the
real deal and another day like today will have the stock
challenging the $85-86 resistance area.  Unless you were quick to
jump on the momentum move right out of the gate this morning,
you're still waiting for a viable entry into the play and after
today's sharp rise, that means waiting for a pullback.  There's
plenty of time until earnings at the end of August, so prudent
investors will want to wait for a pullback to the $80-81 area,
providing confirmation that the site of the recent breakout is now
support.  The primary reason for not suggesting new momentum
entries after today's run is that the stock is now trading well
above its upper Bollinger band and we'd prefer to wait for the
likely pullback before entry, making risk more palatable to
manage.  Note that we're raising our stop to $78.50, just below
Friday's intraday low.

Suggested Options:
Shorter Term: The August 80 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 September 85 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 can use the September 80 Call.

BUY CALL AUG-80 AZO-HP OI=2432 at $3.80 SL=2.25
BUY CALL AUG-85 AZO-HQ OI= 818 at $0.90 SL=0.40
BUY CALL SEP-80 AZO-IP OI=1355 at $5.30 SL=3.25
BUY CALL SEP-85 AZO-IQ OI= 730 at $2.50 SL=1.25

Annotated Chart of AZO:




Picked on July 27th at    $80.17
Change since picked:       +2.78
Earnings Date           08/26/03 (unconfirmed)
Average Daily Volume =  1.29 mln



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

Individual Stocks Rally

United Technologies - UTX - close: 76.66 change: +1.02

WHAT TO WATCH: Dow component UTX continues to demonstrate
strength above the $74.00 level and the bounce today looks
tempting for new bullish entries.  Could a run to $80.00 be just
around the corner?

Chart=


---

Netease.com - NTES - close: 44.41 change: +2.34

WHAT TO WATCH: The rally for NTES continues.  The company
reported earnings after the bell today.  The company beat by 4
cents with strong revenue growth.  We noticed that shares had
broken out of what appeared to be a bull flag pattern.  A pull
back to $40-41 might be an intriguing entry point but given the
strength we may not see such a pull back.

Chart=


---

Johnson and Johnson - JNJ - close: $51.46 change: +0.77

WHAT TO WATCH: Weakness continues for drug giant JNJ.  The trend
of lower highs could be leading to a breakdown through support of
$51.00.  While there looks like there "should" be support at
$50.00 it may not hold.

Chart=


---

Northrop Gruman - NOC - close: 92.36 change: +5.26

WHAT TO WATCH: NOC announced its earnings this morning before the
bell.  The company beat estimates by a wide margin and guided
higher.  Shares gapped higher above resistance of $90 and its
simple 200-dma on strong volume.  We would look for some follow
through on a move to the $100 level.

Chart=


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

USTR $38.31 - Shares of United Stationer are looking strong after
bouncing along previous resistance of $36.00 last week.  It could
see $40.00 soon.

PTEN $27.70 - Shares of this oil services company continue to
sink.  Today marks the lowest close since January.  The stock
does have stronger support at $27.00 but from the looks of it, it
may not hold.


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

After Friday's Rally, Traders Sat on the Sidelines

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_072803.asp


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