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Daily Newsletter, Monday, 08/04/2003

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The Option Investor Newsletter                   Monday 08-04-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bonded to a Range
Futures Wrap: DOH! Gee...
Index Trader Wrap: See Note
Weekly Fund Wrap: Stock and Bond Funds Post Weekly Losses
Traders Corner: The Final Chapter


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-04-2003         High     Low     Volume Advance/Decline
DJIA     9186.04 + 32.07  9209.15  9048.58 1.59 bln   1143/2070
NASDAQ   1714.06 -  1.56  1723.27  1687.77 1.59 bln   1316/1868
S&P 100   495.50 +  1.86   497.06   487.33   Totals   2459/3938
S&P 500   982.82 +  2.67   985.75   966.84
RUS 2000  464.77 -  3.31   468.12   460.56
DJ TRANS 2575.04 - 20.87  2596.13  2547.47
VIX        22.65 -  0.13    24.90    22.65
VXN        32.65 +  0.17    34.30    32.01
Total Volume 3,453M
Total UpVol  1,733M
Total DnVol  1,583M
52wk Highs     246
52wk Lows      131
TRIN          0.62
PUT/CALL      0.93
*******************************************************************

Bonded to a Range
by James Brown

The range trading continues on Wall Street as the Industrials
added 32 points after overcoming a triple-digit loss earlier in
the day.  The tech-heavy NASDAQ closed in the red, albeit by a
slim margin of less than two points.  Investors seemed to ignore
the better than expected factory orders for June, which came in
+1.7 percent, better than the forecast of +1.5 percent and the
previous month's gain of just +0.4 percent.

The other big "economic" report was from the Semiconductor
Industry Association (SIA).  The SIA announced this morning that
chip sales for the second quarter rose 3.2 percent from the first
quarter and more than 10 percent from the second quarter a year
ago.  The report was positive with comments pointing to a "broad-
based" recovery on the horizon.  SIA projected worldwide sales to
increase 10.1 percent in 2003 and 16.8% in 2004.  Despite the
good news the $SOX semiconductor index rose just 0.38% and
remains below resistance at the 400 mark.

The talk of the day was all about bonds and how higher yields
would or would not impact the economy and the stock market (as if
we didn't hear enough about this subject last week).  The concern
over bond yields has impacted homebuilders and mortgage lenders
in the last several sessions and both groups bounced lightly
today as bonds rose.  The question that seems to be on everyone's
mind is "at what point do bond yields become attractive enough to
initiate an asset allocation from stocks to the perceived safety
of bonds?"  Late Friday and early Monday, the yield on the 10-
year note was above 4.5 percent.  As Jim mentioned in his Sunday
wrap that may already be enough of an incentive for more
conservative money managers to rotate capital back into bonds and
out of stocks.

Chart of the 10-year yield:




There was also plenty of talk about how August and September are
traditionally the two worst months of the year for the stock
market.  It's not hard to understand why.  We're currently in the
doldrums of summer.  Plenty of Wall Street professionals take
their vacations in August, which already exaggerates the normally
light volume during the month.  Couple this with the retail
investors' focus on their own vacation before the kids go back to
school and you can see why August has the lowest average volume
for the year.  The July earnings season is effectively over with
more than 400 of the S&P 500 already reporting and the post-
earnings slump settles in.

As one commentator said on the T.V. today, some of the bulls feel
like just holding the markets in the current trading range is a
victory.  Whether you agree with that statement or not it's hard
to argue that there is any real direction.  The Industrials
bounced off the 9050 level and some might argue it's 50-dma.  The
NASDAQ Composite bounced from the 1687 mark, which coincides with
the July 25th low.  The S&P 500 bounced strongly from the 966
level, which is relatively close to the July 1st low of 962.
However, despite the bounce in the SPX it's still below the
simple 50-dma.

Not helping the U.S. markets today were generally flat to down
European bourses and a decidedly negative Asian market place with
the NIKKEI leading the way down -158 points or -1.65%.

Chart of the Dow Jones Industrials:




Chart of the NASDAQ Composite:




Merger Mondays are back and leading off was heavy hitter General
Electric (GE).  GE has sold its insurance business to a group of
investors lead by The PMI Group (NYSE: PMI) for $1.86 billion in
cash.  According to reporters this deal reflects GE's goal to
sell off slower-growth businesses.  Meanwhile in the
semiconductor world, more specifically the graphic chips
industry, NVIDIA (NASDAQ: NVDA) agreed to buy MediaQ for $70
million.  MediaQ develops solutions to improve graphic displays
and reduce power consumption.  Rounding out the day's deals and
mergers is Genzyme (NASDAQ: GENZ) who agreed to acquire SangStat
Medical (NASDAQ:SANG) for $600 million in cash.  This amounts to
$22.50 a share for SANG and the stock soared 44 percent to $22.23
with shares of GENZ dropping more than 3 percent.  GENZ said that
the acquisition would affect earnings throughout 2004.

As we look ahead to tomorrow there are still a few earnings that
could be significant but probably not market movers.  Headlining
the earnings show tomorrow is Cisco Systems (NASDAQ:CSCO) the
router/networking giant.  Estimates are for 15-cents a share but
more importantly will be what CSCO's CEO Chambers or his
management team says about Q3 and Q4 guidance.  Also on the list
is consumables giant Gillette (NYSE:G), financial behemoth
Prudential (NYSE:PRU), and Internet conglomerate Interactive Corp
(NASDAQ: IACI).

It will also be interesting to see how the market reacts to a
record bond auction this week.  The U.S. will be selling $24
billion in three-year notes on Tuesday, some $18 billion in 5-
year notes on Wednesday, and $18 billion in 10-year bonds on
Thursday.  That's $60 billion in new treasury notes that the
market will need to absorb, which could drive the price of bonds
even lower.  That of course would drive bond yields higher and
put even more pressure on the stocks as conservative traders seek
to move to the relative safety of bonds.


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

DOH! Gee...
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U      997    989    977    968    956
YM03U     9288   9217   9122   9051   8956
NQ03U     1300   1282   1262   1244   1224


10 minute chart of the US Dollar Index




The US Dollar Index has been selling off since its Friday high,
and added to its losses throughout today's session, testing
support in the low 96 area and trading 96.15 as of this writing.
The action coincided with renewed buying in treasuries, equities,
and gold.  As discussed in the weekend Futures Wrap, we're seeing
a "liquidity-driven" trade, with the US Dollar Index trading
inversely to all other financial assets.  My belief is that
increases in the supply of dollars are buoying everything but
dollars themselves, and this is what appears to have occurred
today.  Last week, money supply decreased, bringing down all
assets but the US Dollar.  Today was either a countertrend
correction, or the start of something bigger.


Daily chart of December gold




In view of the declining volume on the August contract, I've
rolled out to the Decembers and will be covering that chart as of
today.  December gold (GC3Z) recovered, bouncing from Fibonacci
support at 348.  355 looks like the next serious test of upside
resistance, but we note that the contract generated sell signals
on the Macd and stochastics.  If this downphase does not abort
early, another test of the lower trendline could be in the works.
The HUI and XAU spent the day impressively in the green and
closed higher by 2.58 at 165.21 and 1.01 at 81.24 respectively.


Daily chart of the ten year note yield




Treasuries found a bid for a change, with the ten year note yield
dropping 9.3 basis points to close at 4.322%, just north of
trendline and Fibonacci support.  The same liquidity that lifted
equities and gold off their early morning lows helped treasuries
to a strongly positive cash finish, with the ten year treasury
future (ZN3U) up 1.02% as of this writing.  That said, the
uptrend in the ten year note yield remains intact, and while the
oscillators are looking extremely toppy, they're not yet on clear
sell signals.  The Fed added net 1.25B in overnight repos,
announcing a repo of 5.25B to refund the 4B weekend repo maturing
today.


Daily NQ candles




In what I'm observing to be an increasingly frequent occurrence,
we had a picture-perfect breakdown below the rising support
trendline proving to be a fakeout or "throwunder", to use J.M.
Hurst's term.  I should qualify- the breakdown was not picture-
perfect, as the volume was somewhat lighter than one might have
expected, but the price certain broke down quickly and violently
below critical supports.  It reversed hesitantly and moved up
through the cash session, the bids punctuated by brief, violent
buy programs.


30 minute 20 day chart of the NQ




The about-face is clearest on the 30 minute candle charts.  It
looked like a head and shoulders breakdown within a bear wedge
breakdown.  Nevertheless, the pullback was bought, and the action
was sufficient to generate buy signals on the Macd and
stochastics.


Daily ES candles




In the end, Fibonacci support at 980 held with a doji star
verging on a bullish hammer printed on the day.  The long
downside spike tail is an understated representation of the hair-
raising drop in the first hour, compensated by the remainder of
the session's move higher to close in positive territory.


20 day 30 minute chart of the ES




ES failed at 985 resistance, but the bounce, in addition to
discouraging bears and invigorating bulls with a new lease on
life, generated fresh buy signals on the oscillators.  It
appeared at the cash close that we have not yet seen the top of
the move, and I'm in no hurry to stand in front of what may be an
advancing train.  Particularly given the seriousness of last
week's selling in bonds, there's the potential for more
aggressive "liquification" operations from either the Fed, fund
managers receiving beginning-of-the-month contributions, or any
other large players.  We'll follow the charts, but I'm not
convinced that the oscillator up-phases are doomed to fail early.

Daily YM candles





We have the same picture on the YM.  Note the upside and downside
fakeouts.  This is an "all stops, all the time" trading
environment."

20 day 30 minute chart of the YM




Confession time:  I spent most of Sunday playing my old "what if"
game from summer 2002, running through different crash
strategies.  The action in the different fixed income markets
and the "extreme" reporting I saw in the mainstream financial
press, combined with prior week's contraction in home
refinancings and the overall money supply, and the  bearish chart
patterns all had my "gut" feeling very bearish.  When the sharp
drop started out, it rattled my focus because I had been probably
dreaming of a similar cash open, and the action in the tape threw
me off.  My point is that the morning felt so bearish that the
positive close was almost unbelieveable.  In other words, at
least for me, the reversal felt like a true doji, a "DOH!!!!
Gee..." print.  The volume was not sufficiently heavy to make the
bottom printed appear as a significant, long term bottom, but the
reversal was nevertheless important.  Bears had best be hoping
for a failure in the not-too-distant future.

Treasuries pulled back from the brink, as did gold, and the US
dollar index pulled back from its highs, sinking throughout the
session.  Whether today constituted a mere correction in the
weekly trends we discussed during the weekend Futures Wrap, or
whether these are genuine reversals, we cannot yet know.
Hopefully tomorrow will provide some answers.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_080403_1.asp


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

Stock and Bond Funds Post Weekly Losses

Stocks finished lower Friday and for the week ended August 1 as
economic reports dashed hopes that the US economy is recovering.
Non-farm payrolls fell by 44 thousand jobs in July, marking the
sixth consecutive monthly decline.  Meanwhile, the unemployment
rate declined from 6.4% to 6.2% in July.  For the week, the S&P
500 index of large-cap U.S. companies dropped 1.8 percent using
the Vanguard 500 Index Fund as the benchmark.





According to Lipper, all equity fund categories lost ground last
week, but most diversified U.S. equity funds managed to minimize
their weekly losses relative to the Vanguard 500 Index Fund (S&P
500 Index).  Mid- and small-cap fund losses were generally under
one percent for the week.  It was primarily large-cap stocks and
funds that took the beating last week.

The average international stock fund produced a 1.0% weekly loss,
per Lipper, better than the 1.4% loss for the Vanguard Developed
Markets Index Fund, which replicates the MSCI EAFE Index's total
return performance.  Gold funds tumbled 2.7 percent for the week
following big gains two weeks ago.  Emerging-market equity funds
finished the week higher by 0.2 percent, outperforming developed
market equity funds.

Fixed income funds sustained big losses last week, with non-U.S.
income funds losing more than two percent for the weekly period.
Lipper's report shows that global fixed income funds closed the
week lower by 2.1%, while the average international income fund
tumbled 2.2%.  U.S. government/corporate bond funds lost ground
too, with the average fund down about 1.5 percent last week per
Lipper.  That was only slightly better than the 1.6% decline by
the Vanguard Total Bond Market Index Fund, which seeks to match
the return of the Lehman Brothers Aggregate Bond Index.

Equity Fund Group

 Week    YTD    Selected Lipper Equity Indices (Aug-01)
-1.5%  + 8.5%   Balanced Fund Average
-1.6%  + 9.7%   Equity Income Fund Average
-1.0%  +11.9%   International Fund Average
-1.7%  +10.8%   U.S. Large-Cap (Core) Fund Average
-0.7%  +16.6%   U.S. Mid-Cap (Core) Fund Average
-0.1%  +18.8%   U.S. Small-Cap (Core) Fund Average
-1.4%  +14.5%   U.S. Multi-Cap (Core) Fund Average
-0.5%  +28.5%   Science & Technology Fund Average


It was a tough week for large-cap U.S. stock funds as showed by
the 1.8% weekly decline on Vanguard 500 Index Fund and the 2.1%
weekly loss produced by Fidelity Magellan Fund, two fund giants.
Other popular funds with above-average weekly declines included
Fidelity Dividend Growth Fund (-2.8%), Vanguard Windsor II Fund
(-2.3%), Vanguard Growth and Income Fund (-2.5%), Janus 20 Fund
(-2.6%), Oakmark Select Fund (-2.6%), and Legg Mason Value Trust
(-3.1%).

Some diversified funds did a better job of controlling losses on
the week.  For example, Dodge & Cox Stock Fund, which invests in
stocks of all sizes (market caps) using a value approach, closed
the week down just 0.6 percent.  Putnam New Opportunities, which
has a multi-cap growth style, lost only 0.5 percent for the week.

So, the inclusion of smaller-cap names helped to minimize losses
last week relative to pure large-cap funds.  Some mid- and small-
cap funds even showed positive returns for the week.  Two of the
Baron funds (Baron Growth Fund and Baron Small-Cap Fund) enjoyed
positive 1-week returns of 1.0% and 1.4%, respectively.  Bucking
the negative trend last week as well were REIT/real estate funds.
For example, Vanguard REIT Index Fund rose 1.1 percent last week,
while Cohen and Steers Realty Fund was 1.6% higher over the week.

International equity funds produced weekly losses similar to U.S.
stock funds, with weekly losses ranging from zero to two percent.
The popular T. Rowe Price Stock Fund had a negative 1-week total
return of 2.2 percent, while Putnam Global Equity Fund lost 2.0%
for investors.  Meanwhile, Tweedy Browne Global Value Fund ended
the week 0.1% higher, while Artisan International Fund lost only
0.2 percent for the week.  As with U.S. stock funds, losses were
generally greater among funds with large-cap biases, and smaller
among funds with smaller-cap focuses.

Fixed Income Fund Group

 Week    YTD    Selected Lipper Fixed Income Indices (Aug-01)
-1.5%  + 1.1%   Corporate A-Rated Debt Fund Average
-1.3%  - 0.9%   GNMA Fund Average
-2.1%  + 4.9%   Global Fixed Income Fund Average
-1.7%  +14.3%   High Yield Fund Average
-2.3%  + 5.9%   International Fixed Income Fund Average
-1.7%  + 1.2%   Intermediate Investment-Grade Fund Average
-0.6%  + 1.1%   Short Investment-Grade Fund Average
-1.5%  - 1.3%   U.S. Government Bond Fund Average


As you can see, it was an even tougher week for the bond market
and bond funds overall.  U.S. long-term bond funds, global bond
funds and international bond funds all lost over two percent on
the week.  Vanguard Long-Term Corporate Bond Fund, for instance,
lost 2.8 percent for the week, while sibling Vanguard Long-Term
Bond Fund tumbled three percent.  It also hurt to take a lot of
credit risk, as evidenced by the 2.5% weekly loss on PIMCO High
Yield Fund, a popular institutional/retail high-yield bond fund.
Fidelity's high current yield fund also sustained a 1-week loss
(-2.6%).

Global and international fixed income funds, including emerging-
market debt funds, sustained large losses last week, with a few
funds losing over three percent.  Fidelity's New Markets Income
Fund, for example, lost 3.4 percent for the week as Templeton's
Global Bond Fund shed 3.2 percent of its value during the 5-day
period.  The popular T. Rowe Price International Bond Fund lost
2.5 percent for the week.  The only way really to minimize fund
losses last week was to be in short-term bond funds, which lost
about 0.6 percent on average per Lipper.  Short-term muni funds
were down just 0.2 percent on average last week.

Money Market Fund Group

Yield   Selected iMoneyNet Money Market Indices
0.53%   All Taxable MMF Average
0.38%   All Tax-Free MMF Average


The iMoneyNet.com all-taxable money market fund average remained
at 0.53 percent last week (www.imoneynet.com).  The PayPal Money
Market Fund (402-935-7733) remains the highest yielding retail
money market fund, with a current 7-day (simple) yield of 1.03%.

The country's largest prime-retail fund, Fidelity Cash Reserves
shows a current 7-day yield of 0.81%, while the Vanguard Prime
Money Market Fund, another popular money market fund, currently
shows a 0.79% 7-day yield.  Below average expenses help to keep
these two funds competitive.

Fund News, Etc.

Morgan Stanley (NYSE: MWD) indicated last week that it plans to
merge three stock mutual funds into other offerings.  According
to the Reuters story dated August 1, the investment bank's $127
million MS Equity Fund (EQFAX) will be merged into the Dividend
Growth Fund.  Further, the $139 million MS New Discoveries Fund
(NDFAX) and the $20 million MS Next Generation Fund (NGTAX) will
be merged into the Developing Growth Fund.  For more information,
go to the Morgan Stanley website (www.ms.com).

In other Reuters fund news, Oak Value Capital Management, whose
co-founder George Brumley recently died along with 11 members of
his family in a plane crash, announced Thursday that the company
has added two new co-managers on the Oak Value Fund, Larry Coats
and Matthew Sauer.  Both men are members of the Oak Value Fund's
investment committee.  They will assist David Carr in the day to
day portfolio management.  Carr and Brumley co-managed Oak Value
Fund since its creation in 1993.  Go to the Oak Value Fund's web
site at www.oakvaluefund.com for more information.

In Morningstar's Fund Times news, Vanguard has submitted filings
with the SEC outlining plans to introduce 11 new index funds and
nine new exchange-traded funds in the fall, 2003.  New offerings
include Vanguard Large-Cap Index Fund, a new index fund that will
seek to match the return of the MSCI U.S. Prime Market 750 Index;
thus, offering large-cap exposure with some mid-cap exposure (for
greater total return potential).  Sector index funds will also be
offered for the first time.

In other Morningstar fund news, Fidelity plans to launch Advisor
Class shares of its target-timeline series (i.e. Freedom Funds).
The Freedom Funds series, first introduced in 1996, are managed
according to specific time horizons.  The Freedom Funds are all
"funds of funds" and are automatically rebalanced and gradually
adjusted through an active "roll-down" allocation process (that
becomes more conservative as the investor's target or retirement
date approaches).

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

The Final Chapter
by Mark Phillips
mphillips@OptionInvestor.com

I know many of you are thinking "Finally!".  As of tomorrow, 3
months will have transpired since I began this lengthy saga on
developing, refining and using a trading plan for profiting in the
wild and wooly index futures market.  I hope many of you have
found the series as beneficial, as I have found it enjoyable to
write.  After completing today's installment though, I feel that
we've just about exhausted all the meaningful material that I have
to share.  Of course, if you feel differently, don't hesitate to
drop me a line telling me what areas you'd me to further clarify.

I almost hesitate to provide this list, given the length of this
series, but here it is.  If you're just joining us, then please
take the time to catch up using the links below.  It will make
today's discussion much more useful.

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

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

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

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

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

Discipline Failure
http://www.OptionInvestor.com/traderscorner/tc_063003_1.asp

A Day In The Life
http://www.OptionInvestor.com/traderscorner/tc_070903_1.asp

The Good, The Bad and The Ugly
http://www.OptionInvestor.com/traderscorner/tc_073003_1.asp

Our last two discussions have centered on me dissecting the
intraday action in the ES and showing how I have traded the days
that we've put under the microscope.  Believe it or not, I'm going
to do the same thing today, because there are some interesting
nuances to my approach that I mentioned in passing in some of the
earlier articles, but haven't covered yet in the actual trading
portion of this series.  So let's go.

I'm going to skip the daily chart today, as it really hasn't
changed much, with daily Stochastics meandering aimlessly between
overbought and oversold.  If you've been trading the ES, I think
you've likewise determined that there isn't much useful
information to be gleaned from that timeframe right now.  So let's
start off with the 60/30-minute charts to set the stage and then
we'll jump right down to the 5-minute charts where we can dissect
today's individual trades.

ES 60/30 Minute Chart Montage




Note that as we came into today's session, the 60-minute chart was
buried in oversold as measured by Stochastics, but so far there
was no sign of an upturn.  Looking over at the 30-minute chart, we
can see that the Stochastics had generated a short-cycle bearish
reversal on Friday afternoon, setting the stage for another
downdraft this morning.  So before the open, we had a bearish
bias, but in the back of our collective minds should have been the
thought that the downside is likely to be limited due to the
position of the hourly Stochastics.

ES 5 Minute Chart for Monday Morning




Sure enough, the opening action was weak, with a slight gap down
that was effectively filled in the first 10 minutes before price
action turned south with conviction.  Taking a short on the break
of 976 (stop 979) was good for a quick plunge to the 970 area and
after a bit of gyration in the 968-971 area, the ES continued its
slide down to the 966 level, where we were out for an early +10.
The gyrations around the 10am release of whatever economic report
was released came very close to taking out the trailed stop at
972, but it survived and by the end of the first hour, we had a
nice trade under our belt and were ready for the remainder of the
day.

I think this is a good point to discuss my approach to trailing
stops.  Observant readers will note that the low on the 9:50
candle was 968.50, while the high on the 10:00 candle was 971.50
for a total range of 4 points.  Why wasn't I stopped out at that
point?  I trail my stops based on whole numbers most of the time,
so when 969 was traded, by stop moved down to 972.  It would have
taken a trade at 968 for me to trail my stop down to 971.  That
didn't happen until a couple bars later and then our resting order
took us out for +10 when the ES hit 966.

Next up on the morning chart above was a bullish crossover as the
ES began to recover off its lows around 10:45am ET.  As noted, I
didn't take that trade and the reason is very simple.  I hadn't
seen the slightest sign of life from either the 60-minute or 30-
minute charts yet.  That told me that while this could be the
beginning of a V-bottom reversal, taking the trade based on that
expectation alone was a lower-odds bet and most likely premature.
By the time the 5-minute Stochastics topped out in overbought near
11:30am ET, we can see the ES just brushing the 970 level for
roughly a 2-3 point gain from where we got the entry signal.  I
don't often get excited about moves of that size, so in hindsight
I could look at the move and feel good about passing on that
counter-trend entry.

ES 5 Minute Chart for Monday Afternoon




That brings us to the bearish cross on the Stochastics near
11:45am ET, which you'll note I didn't take either.  "C'mon Mark,
what's the story?", I can hear you asking.  Believe it or not, at
this point I'm seeing the POTENTIAL for a bottom forming on the
30-minute Stochs.  The hourly is still buried in oversold and I
made the decision that I was done trying to game the downside for
today.  As it turns out, that was the right decision, as there
wasn't another viable bearish trade for the remainder of the day,
with volatile, spiky Buy program action dominating the remainder
of the afternoon.  As Jim pointed out in the Futures Monitor, the
only way to profit from those moves is to already have a position
when those Buy programs appear out of the blue.  That is the key
objective of this sort of trading approach, in that I am trying to
get into a position trade at key inflection points, BEFORE the big
boys show their hand.

By shortly after noon, we're starting to see volume on the rise
(this is atypical for the lunchtime lull), there's just the
slightest hint of an upturn in the 30-minute Stochastics and the
5-minute Stochastics begins to make a short-cycle bullish turn.
Long at 969.50 with a stop 3 points below and we're back in the
game for better or for worse.  Well, it didn't take long and the
first spiky Buy program hit the tape, jerking the ES up to 976.75
in the blink of an eye.  This is where Lady Luck intervened on my
behalf.  Due to a distraction that pulled me away from my computer
for about 10 minutes, I completely missed the sharp spike and
resulting pullback into the 971-973 area.  When I came back to the
screen and saw the pullback, all I could do was snug up a tight
stop just below the low of the 12:25 bar (971.75) and I went with
a stop at 971.  Had I noticed the spike to 976.75, the stop SHOULD
have gone to 972 and the pullback to 971.75 would have had me
stopped out for +2.50.  But since I didn't, the stop held and the
position was alive for the next Buy program driven spike to
979.25.  I was watching the action this time, tightened my stop to
976.50 and was stopped out for +7 on the pullback.

I know what you're wondering here.  Why did I trail my stop to
2.50 points instead of the customary 3 points?  Here's where
another fine point comes into play.  When a play gets within a
point of my targeted +10 point gain, I will get more aggressive
with my stop, trailing to only 2.50 points behind the highest
round number reached.  So, while I managed to get out with a solid
gain of +7, it was a bit frustrating to miss a second +10 trade by
one measly tick.  Close, but no cigar.

Next up was perhaps my favorite trade of the day.  Note that we
ignore the bearish crossover near 1:30pm ET, as the hourly and 30-
minute charts are now clearly in bull mode.  That means our next
trade setup is the bullish crossover at 2:20pm ET.  I cheated a
bit on this one due to my expectation for a bullish continuation
trade and got filled at 974.  I was hoping for a rise back to the
980-982 area (the site of Friday's afternoon consolidation), but
following the plan, keyed in the exit order to sell at 984.
Imagine my surprise and glee to see somebody launch another (the
strongest of the day) Buy program and take me out for another +10
near the high of the day only 25 minutes after the trade was
initiated.  Clearly, the 3-point trailing stop was never
threatened.

I had actually intended to show a less stellar performance for
this final article in the hopes that you could see how the
position management side of the equation works.  Obviously, a +27-
point day on several large and quick moves doesn't fit the bill.
But hopefully my discussion of how I managed the stops on that
second trade helps to provide a bit more clarity on that issue.

As I mentioned above, this is the end of my planned series on
trading the ES, but that doesn't preclude a future follow-up
article if there is sufficient interest.  Perhaps the next time I
have a bad trading day with 2-3 losses and no significant winners
(Yes, they happen on an all-too-frequent basis), I'll dissect one
of those in one last installment in this series.  Let me know if
there's something I've left out or that is unclear and I'll be
sure to dive into those questions in a public format at the
earliest convenience.  On the other hand, if you would prefer I
get back to the options side of the game or some other topic, I'll
be happy to do that as well.  I aim to please!

Have a great week!

Mark


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The Option Investor Newsletter                   Monday 08-04-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: KSS, LLL, PCAR, BDK, HD
Dropped Calls: GENZ
Dropped Puts: None
Play of the Day: Call - PCAR
Watch List: Financials, Telecom & Tech

Updated on the site tonight:
Market Posture: S&P: "S" is for "Sideways" and "P" is for
"Predictable."



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

KSS - call
Adjust from $56.50 up to $57.25

LLL - call
Adjust from $46.50 up to $47.25

PCAR - call
Adjust from $72.99 up to $74.00

BDK - put
Adjust from $42.01 down to $41.25

HD - put
Adjust from $32.00 down to $31.50


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

Genzyme Corp. - GENZ - close: 47.62 change: -1.66 stop: 47.49

Friday's weakness in shares of GENZ made us nervous and for good
reason!  When news broke this morning that the company would be
acquiring SangStat Medical for roughly $600 million in cash, the
stock plummeted, reaching an early low of $45.01.  Clearly that
should have triggered any resting stops.  While it was encouraging
to see the stock rebound to close back above our stop and near its
opening tick, the damage has clearly been done.  The uptrend has
been decisively broken and it is time to move on.  Traders that
weren't stopped out on the early plunge this morning should use
any move over $48 as an opportunity for a more favorable exit.

Picked on July 22nd at     $85.85
Change since picked:        -2.14
Earnings Date             10/15/03 (unconfirmed)
Average Daily Volume =    3.51 mln




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

None


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

PACCAR - PCAR - close: 78.35 change: +1.43 stop: 74.00*new*

Company Description:
PACCAR is a global technology leader in the design, manufacture
and customer support of high-quality light-, medium- and heavy-
duty trucks under the Kenworth, Peterbilt, DAF and Foden
nameplates. It also provides financial services and distributes
truck parts related to its principal business. In addition, the
Bellevue, Washington-based company manufactures winches under the
Braden, Gearmatic and Carco nameplates. (source: company press
release)

Why we like it:
PCAR is a new addition to the call list from Thursday.  There has
been little change to the stock price and no new news.  The
original play write up is below.

We are a little hesitant to be adding new bullish plays in the
current sideways/overbought market but it is hard to ignore PCAR's
incredible relative strength.  The company announced earnings on
July 24th and the numbers were positive.  Analyst had been
expecting 98-cents a share.  The company turned in $1.06 (per
diluted share).  Revenues were 12 percent higher than the same
period last year at $2.0 billion.  Net income jumped by 68 percent
to $124.1 million.  Management said things were improving and the
industry saw heavy-duty truck orders jump almost 10 percent in
North America.  We're actually surprised that management didn't
announce another stock split.

The breakout over the $75 level of resistance is not only a new
yearly high but it's a new all-time high.  The burst higher was on
stronger than average volume and the stock's MACD has now rolled
back up into a buy signal.  Stochastics, momentum and RSI are also
creeping higher.  PCAR's P&F chart is also impressive.  The move
today produced a fresh triple-top buy signal.  We realize that
shares look over-extended and due for a major pull back,
especially on the weekly chart.  However, as a short-term options
trader we think there is an opportunity to catch a move to the
$82.50 maybe the $85.00 level.  We're going to try and reduce our
risk with a stop loss at 72.99.  We're not opposed to new
positions at current levels but the best entry point would be on a
dip towards the $75.00-75.50 area (previous resistance).

Why This is our Play of the Day
Despite our trepidation when we added PCAR as a bullish play late
last week, the stock continued to defy gravity on Monday.  After
an early dip to just below $76, buyers appeared en masse and
propelled the stock higher to end at another new all-time high.
Once again, volume was strong at 2.1 million shares, nearly
doubling the ADV as the stock gained 1.85%.  The ascending channel
that began back in late January is still in force, providing an
intraday cap near $80.  Prior resistance in the $75-76 area is now
acting as support and intraday dips into this area should continue
to provide attractive entry opportunities.  Following last
Thursday's breakout above $76, it appears clear that the 10-dma
($74.70) should hold as solid support, giving us the freedom to
raise our stop to $74, just below last Thursday'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 near the
money.  Keep in mind the added risk of time decay though, with
August contracts expiring next Friday.  More conservative short-
term traders may want to use the $75 August strike.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the September 80 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 75 Call.

BUY CALL AUG-75 PAQ-HO OI=450 at $4.20 SL=2.50
BUY CALL AUG-80 PAQ-HP OI=109 at $1.15 SL=0.50
BUY CALL SEP-75 PAQ-IO OI= 58 at $5.80 SL=3.75
BUY CALL SEP-80 PAQ-IP OI= 97 at $2.85 SL=1.50

Annotated Chart of PCAR:



Picked on July 31st at    $77.24
Change since picked:       +1.11
Earnings Date           10/23/03 (unconfirmed)
Average Daily Volume =  1.17 mln



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

Financials, Telecom & Tech

United Technologies - UTX - close: 75.76 change: +0.52

WHAT TO WATCH: Shares of UTX have been no stranger to the watch
list.  As one of the stronger stocks and most heavily weighted
components on the Dow Jones Industrials it is one that bulls
would do well to keep an eye on.  UTX appears to be in a steady
trend higher but it's still chewing through resistance in the
$76-78 range.  The recent dip to $75 held and bulls might be
ready for a run towards the $80 level if the market cooperates.

Chart=


---

Bank of America - BAC - close: 81.60 change: +0.86

WHAT TO WATCH: BAC has spent the last three weeks consolidating
sideways essentially between $81 and $84.  Despite this lack of
real "movement" it still out performed the major banking indices.
Dip buyers stepped in when BAC slipped to the $80 mark.  It would
not be unreasonable to expect a bounce back towards the $84
level.  The question is whether it can break it.

Chart=


---

AT&T - T - close: 21.72 change: -0.38

WHAT TO WATCH: Investors would do well to follow up with their
own due diligence on AT&T before considering a play but the chart
looks interesting.  Shares have recovered back to the bottom of
its mid-January gap, which is resistance at $22.50.  A break into
the gap would normally produce a "fill the gap" move.  In this
case that would be $25.00.  P&F chart readers might disagree with
bearish resistance on the P&F chart at $24.00.  Currently T's
stock has a dividend yield of more than 3.3%.

Chart=


---

Electronic Arts - ERTS - close: 84.95 change: +1.46

WHAT TO WATCH: Closing at new all-time highs on Monday made ERTS
a standout winner among a weary market.  Shares have been able to
hang on to their post-earnings gains and buyers are stepping up
to defend the $82 level as new support.  Bullish traders willing
to ignore a $35 increase in this tech stock since late February
might want to position themselves for a run to the $90 mark.
Then there is the old saying that most stocks that hit $90 tend
to hit $100.  We're not sure how much stock we'd put in that
adage but we would use a good stop, maybe just under $82.

Chart=



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

AMGN $68.16 - AMGN has made it to the watch list quite often
recently.  We've been speculating on a pull back to the 50-dma as
a chance for bulls to buy the dip at support.  We got that dip to
the 50-dma today.  Obviously bears will be looking for a close
under the 50-dma.

PIXR $68.59 - Shares of PIXAR, partners in the successful summer
film "Finding Nemo", have found new support at the $65.00 level
and look ready for a breakout above the $70 mark.

AMAT $19.77 - The trend of higher lows is building up steam
against overhead resistance of $20 in shares of AMAT.  A breakout
could lead to a profitable rally higher.


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

S&P: "S" is for "Sideways" and "P" is for "Predictable."

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_080403.asp


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