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Daily Newsletter, Tuesday, 08/12/2003

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The Option Investor Newsletter                 Tuesday 08-12-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Ok, Now What?
Futures Markets: FOMC Op-Ex Week Trading
Index Trader Wrap: Inline with guarded optimism
Market Sentiment: Volume patterns


Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-12-2003           High     Low     Volume Advance/Decline
DJIA     8310.06 + 92.70  9310.27  9208.80 1.36 bln   2211/ 996
NASDAQ   1687.01 + 25.50  1687.48  1660.66 1.30 bln   2162/1028
S&P 100   499.74 +  4.62   499.76   494.45   Totals   4373/2024
S&P 500   990.35 +  9.76   990.41   979.90
W5000    9530.43 + 99.10  9530.72  9431.38
RUS 2000  466.95 +  7.68   466.95   459.27
DJ TRANS 2607.47 + 21.70  2607.51  2583.89
VIX        20.21 -  1.21    21.60    20.19
VXN        30.21 -  1.91    32.90    29.89
Total Volume 2,863M
Total UpVol  2,242M
Total DnVol    573M
52wk Highs  309
52wk Lows    41
TRIN       0.86
NAZTRIN    0.72
PUT/CALL   0.77
************************************************************


Ok, Now What?

The long awaited FOMC meeting is history and the outcome was
no surprise to anyone. The Dow rocketed to close over 9300
and the Nasdaq is nearing 1700 once again. What is wrong with
this picture? Conviction, total lack of conviction and growing
disbelief that the economics will hold. Bears and bulls alike
are scratching their heads as the indexes move up but the
confirming volume is continuing to shrink. Today was the
second lowest volume day, behind Monday as first, since May
with less than three billion shares for the third consecutive
day.

Dow Chart


Nasdaq Compx Chart


S&P Chart


Wilshire-5000 Chart



Two economic reports today were far from positive for the
bulls. The Chain Store Sales rose only +0.1% from the prior
week despite sales tax holidays in six states and the second
wave of tax credit checks. Back to school sales are reportedly
off to a strong start but with only a +0.1% gain in sales it
would appear anemic.

Even more troublesome was the Richmond Fed manufacturing Survey
which came in at -7 for July. This was a substantial weakening
of the conditions and every component lost ground. New Orders
fell to -13 from zero, Shipments fell to -7 from +1. Order
Backlog fell to -17 from -15 and the six-month outlook fell to
28 from 41. There was nothing positive in this release and after
two months of improvement it appears the trend has reversed.
The survey showed four consecutive months of retraction which
ended in June with a barely positive +1 for the headline number.
The drop back into negative territory was the worst showing in
three months. Expected shipments fell to the lowest level since
October-2001. This report was in sharp contrast to the national
ISM survey announced last week, which showed an improvement in
conditions. If the Richmond Fed Survey is a leading indicator
for the August ISM then we could be in trouble.




Note how the Richmond Fed has performed in relation to the ISM
over the last seven months. It actually was more positive in
the June period but we see significant divergence in July. One
problem with the ISM bounce was the 44% increase from defense
spending which inflated the ISM. Without those defense numbers
the ISM may have been much closer to negative. More analysts
are beginning to worry that the bounce in the July numbers
across the board were a reaction to the temporary post war
economic bounce. If that bounce fails to grow legs soon the
fall economic recovery could evaporate once again.

After the close today there were some more discouraging signs
that all is not improving as much as traders had hoped. AMAT
announced earnings that beat the street after one time items
but then guided analysts lower for the coming quarter. New
orders fell -41% from the year ago quarter but +9% above the
2Q. The company said the semiconductor sector appeared to have
bottomed after a three year spending drought but then guided
analysts that revenue would be flat to only slightly up for
the next quarter. They estimate earnings of 4-5 cents when
analysts consensus was six cents. The CEO said expectations
were high that users would upgrade to the new 12 inch wafer
products but he said that bookings were less than expectations.
AMAT said it appeared capex spending would be flat to only
slightly improved over 2002 levels. AMAT fell in after hours
trading.

Also reporting after the bell was MXIM, which reported inline
with estimates said bookings for next quarter only rose +2%
and were less than analysts had expected. CSC also reported
inline with estimates but said the harsh climate has resulted
in a slow-down in corporate spending but government contracts
had held up well. They currently have $38 billion in federal
contracts in the pipeline. They guided inline with estimates
but some analysts said the slow down in non-government orders
was a concern.

The biggest news of the day was the FOMC meeting and the
monetary policy announcement. The results were as expected
with no rate change and with the Fed even going so far as to
say the current rate environment could be maintained for a
considerable period. This comment was an attempt by the Fed
to calm the bond market and slow the current explosion in
rates. This does not mean those rates will return to prior
lows but there should be a return to normalcy. Coupled with
the implied promise not to raise rates was another warning
that deflation, or "the risk of inflation becoming undesirably
low" as stated in the announcement, was still a threat. They
said that "an unwelcome fall in inflation" was greater than
the risk of rising inflation. On the positive side they said
underlying growth in productivity was continuing to support
economic activity (same sentence in June announcement) and
spending was firming.

The Fed did everything they could to say positive things
while keeping irrational exuberance in check. If they were
too bullish then the bond junkies would start dumping bonds
and pushing up rates. If they were too bearish stocks would
tank and damage the recovery sentiment. The markets
celebrated the Fed action but not immediately. Nearly 30
minutes passed after the announcement before a flurry of buy
programs at Dow 9200 support pushed the averages to the highs
for the day. Once the buy programs ended the markets bled
points for about 30 minutes until a market on close order
imbalance prompted another buying surge. Shorts faced with
indexes pressing the highs for the day, week and month
decided to surrender and bought the close. The Dow closed
over 9300 and the highest close in over a month. Only -50
points from the 52-week high it was very encouraging to
traders.

While the close was impressive the week is far from over.
The economic calendar is chock full of large reports over the
next three days and this is a triple digit expiration week.
We have PPI, CPI and sentiment along with numerous other
reports. The earnings expectations are very high and as we
saw from AMAT, MXIM and CSC tonight the future is not that
rosy. Above all the Fed announcement was already priced in
and the market reaction surprised most professional traders.
Tuesday was the fifth consecutive gain for the Dow and a
+310 point gain off last weeks lows. Also confounding the
bears is the calendar. August is historically the worst
month for the major averages and especially when there have
been big gains. Instead of weakness we are seeing new 52-week
highs beginning to grow and the volatility indicators falling.
The VIX closed at 20.21 and only .58 away from a new 52-week
low. That is only .28 away from the July 28th low of 19.93
and the beginning of the two week Dow decline. Note the
market reaction in the charts below when the VIX neared 20
in recent weeks. It is not always immediate but it will
happen.

VIX/Dow Chart




You be the judge. We had a nice rally and a nice bout of
normal profit taking. Was it enough? There are still very
large paper profits still on the books. With the Fed on
hold until after the Nov-2004 elections and economics that
suggest the bottom is behind us, is the future so bright
we need to wear shades? Nobody can tell the future in
advance but it appears there continues to be a bullish
undertone in the markets. Bulls are buying the dips and
climbing the wall of worry so fast they look like candidates
for the Olympic pole vault. Last week we had serious sell
programs hit on every good piece of economic news. Today
we had buy programs control the outcome. What gives?

There is only one thing ruining this picture. Without this
one piece of data all the gains over the last five days are
seriously at risk. That piece of data is volume. We had
the three lowest volume days in months beginning last Friday.
Volume has been declining since last Thursday's 3.98 billion.
Friday 2.9B, Monday 2.68B and Tuesday 2.8B. Three consecutive
days under 3.0 billion shares traded on all markets. When
volume returns we are going to get some huge moves. The
problem is which side is going to find the conviction first?
Were the bulls waiting for the Fed meeting to validate their
assumptions so they could add to positions? If so then the
upside volume should increase substantially on Wednesday.

Were the bulls waiting for the Fed and hoping to get one
more injection of speed to inflate their parachutes as they
sell to the retail traders venturing back into the market?
Maybe the bears were waiting for the Fed meeting to avoid
any nasty surprises before piling on for the slide into
October. Nobody knows in advance but they will know when
the next big volume surge hits stocks. Tomorrow, Friday or
next week is the question. We are at levels where the bulls
have failed on high volume several times before. They will
have to enlist help to climb from here. There is plenty of
help out there but it needs to be convinced to buy at the
top. Everybody know what normally happens in September/October
and until they can be convinced the Halloween party has been
cancelled they may elect to watch from the sidelines. Either
way the next week could be exciting. Watch the volume for
direction.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

FOMC Op-Ex Week Trading
Jonathan Levinson

The session opened uneventfully and became excruciatingly boring
in a hurry as traders awaited the FOMC statement at 2:15 EST.
Equities sold off following the statement but reversed in a two-
pronged flagpole rally, carrying the indices to close at their
highs of the day.  Treasuries traded flat to a slightly positive
close and gold remained negative throughout the session.



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




Daily chart of the US Dollar Index





Europe came "online" last night, rescuing the US Dollar Index
from its lows in a formation we recall from last year as the
colloquial "Corynthian Geyser".  The gains in overnight buying
proved unsustainable, but they were sufficient to keep gold and
CDN dollar, euro and swiss franc futures all lower throughout
today's session.

Daily chart of December gold




Gold printed an inside day, moving sideways and not disturbing
the oscillators either way in today's narrow-range session.
December gold closed lower by 2.30 at 361, HUI –2.7 to 177.46,
and XAU –1.5 to 86.21.  The CRB lost .05 to close at 237.12.
Corn, soybeans and natural gas led the gainers.


Daily chart of the ten year note yield




The FOMC's goal today appears to have been to avoid upsetting the
applecart for treasuries, and it appears to have succeeded for
the moment, with light buying returning to bonds following the
2:15 announcement after what had been a quiet, dull session.  The
ten year note yield dropped 1.4 basis points to 4.357%, the
thirty  down a mere 0.3 basis points to 5.293%.  The trendline
failure remains intact, as do the oscillator sell signs on the
one day candles, but it remains a choppy, directionless market
this week.

Daily NQ candles




The NQ cleared the 50 day EMA and found resistance at the 22 day
EMA in a very bullish session.  The oscillator downphases have
paused and appear to be two upside days away from printing buy
signals.  Despite the gain, today's afternoon rally did nothing
to change the picture on the daily chart, bringing the NQ up to
the beginning of serious resistance above 1245.  However, today
completed two white crows, and the bullish action certainly did
not hurt the chart any.  Today's gains should be tested tomorrow,
as is more readily apparent from the 30 minute candles below.


30 minute 20 day chart of the NQ




NQ printed an ascending triangle breakout above 1230, running
almost unhindered to fib resistance at 1245.  As appears from the
chart, this is a significant horizontal resistance level, and it
will take strong dedication from the bulls to overcome it.
Nonetheless, the oscillators are now trending bullishly higher,
and the action on the Dow and S&P futures give bears reason to
exercise either patience or caution, preferably both, before
stepping in front of this rally.


Daily ES candles




The ES broke the upper descending trendline on the bull flag we
have been following.  The oscillators have given bullish kisses
and the stochastic appears to be in the process of crossing to
the upside.  Like the NQ, the ES has resistance directly ahead,
more apparent on the 30 minute chart.  Nevertheless, today was a
very strong day for the ES.

20 day 30 minute chart of the ES




Fib resistance is at 991, coinciding with the upper trendline on
the bear flag discussed last night.  The oscillators are trending
higher since the bounce off the post-FOMC lows, while resistance
remains ahead, the bull wedge breakout remains in effect,
projecting to a possible 1004 target.  Note that the resistance
on the ES is thinner than that on the NQ.

Daily YM candles




The Dow futures actually closed above the broken trendline,
leading the other equity indices to the upside.  The oscillators
are on buy signals, the stochastic from a higher low, and
resistance is very sparse on the 30 minute chart, placing the
9340 highs close within view.


20 day 30 minute chart of the YM





While the oscillators are trending higher, they remain in
overbought territory during op-ex week in another light volume
session.  Whether new highs get printed tomorrow is anyone's
guess, though the YM has the best chance of getting there.  Bears
need to be aware that whether it's credible or not, the indices
have rallied nicely for the past week, and the short term trend
remains up.  How long it lasts is the real question, and tomorrow
will provide some answers.


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


Inline with guarded optimism

Equity markets cheered and bond markets sighed relief as the Fed
that said little and did little when the Federal Open Market
Committee left its fed funds rate unchanged at 1.0%, saying its
economic risk indicators are weighted evenly toward strength and
weakness.

For the most part, the Fed said exactly what both the bond and
stock markets may have wanted to hear.  Nothing!  There was no
jawboning from the FOMC, with clear statement that a still anemic
jobs market and little signs of inflation continue to allow the
Fed to maintain a monetary policy to allow further time for more
signs of sustainable growth to present itself, and maintain a
more friendly monetary policy for the foreseeable future.

Equity bulls appeared cheerful, pushing the Dow Industrials
(INDU) 9,310.06 +1% higher into the close, finishing just 51-
points shy of its 52-week high set on July 31st, with tech-
component Hewlett Packard (NYSE:HPQ) $20.95 +4.95% reversing
recent losses ahead of next Tuesday's quarterly earnings report.

Sectors finished broadly positive with the Securities
Broker/Dealer Index (XBD.X) 570.67 +3.11% and Biotechnology Index
(BTX.X) 445.39 +3.13% vying for today's sector winners, while
sector declines were limited to both gold equity sectors with the
AMEX Gold Bugs Index ($HUI.X) 177.46 -1.49% pulling back from
yesterday's 52-week high.

The broader bullish sector trade found the S&P 500 Index (SPX.X)
990.35 +0.99% closing at its best levels of the session with a
9.7-point gain, while the narrower S&P 100 Index (OEX.X) 499.74
+0.93% flirted with the 500 level to close up 4.6 points.  Equity
bulls made deposits in both the money center banks as the KBW
Banking Index (BKX.X) 886.30 +1.29% gained 11.3 points, while the
more regional S&P Bank Index (BIX.X) +0.94% gained 2.8 points.

Technology shares broke above their recent monthly lows with the
tech-heavy NASDAQ-100 Index (NDX.X) 1,240 +1.43% rallying back to
test its intermediate-term 50-day SMA of 1,241, while its
Tracking Stock (AMEX:QQQ) $30.86 +1.51% gained 46 cents on the
session, before easing back to $30.78 in after-hours trade after
semiconductor-equipment giant Applied Materials (NASDAQ:AMAT)
$18.45 reported Q3 (July) earnings of $0.05 per share (excluding
$0.07 per share restructuring charge), which was a penny better
than forecasted.  However the company's guidance for Q4 (October)
for EPS of $0.04 to $0.05 and revenues being "flat to slightly
up" from Q3's $1.09 billion, would be below consensus estimates
of $0.06 and $1.21 billion respectively.  The company also said
it is cautious on the remainder of 2003 and looks for calendar
year 2003 capital spending to be "flat to slightly above calendar
year 2002 levels," which assumes an up tick in the second half of
the year.  Shares of Applied Materials (AMAT) finished the
regular session with a gain of 11 cents to $18.45, but fell to
$18.21, or 1.3%, in after-hours trade.

The Semiconductor HOLDRs (AMEX:SMH) $31.59 +1.57% saw active
trade at $31.40 in tonight's late session.

Treasuries found buyers in the major maturities, with the 5-year
September futures contract (fv03u) 112'115 +0.24% gaining 8/32
with its YIELD ($FVX.X) falling 4.6 basis points to close at
3.209%, while the benchmark 10-year YIELD ($TNX.X) slipped lower
by 1.4 basis points to 4.357%, with its September futures
contract (ty03u) 112'080 +0.14% gaining 5/32.  The longer-dated
30-year September futures contract (us03u) 107'02 +0.14% edged up
5/32, as its YIELD ($TYX.X) edged back fractionally to 5.293%.

The dollar as depicted by the U.S. Dollar Index (dx00y) 96.15
+0.29% gained 0.28 points, with September euro futures (eu03u)
1.1297 -0.46% lower by 0.0053, while September yen futures
(jy03u) .008453 +0.24% gained 0.000021.

Pivot Analysis Matrix



The Dow Industrials (INDU), S&P 500 (SPX.X) and S&P 100 Index
(OEX.X) reached their WEEKLY R1's in respective fashion today,
with the NASDAQ-100 Index (NDX.X) reclaiming its weekly pivot.

The bulk of today's gains for the indices came in the final hour
of trade and intra-day volumes showed interest among trader after
hourly volumes were building at just over 100 million shares per
hour from 01:00 PM EST, to build by approximately 400 million
shares on both the NYSE and NASDAQ in the final hour of trade,
which gives me the feel that there may be some carry over
bullishness into tomorrow's trade, with the major equity indices
closing near their highs of the session.

S&P Bank Index (BIX.X) - Daily Interval



With the SPX and OEX both regaining their weekly R1's, the BIX.X
lags in its WEEKLY pivot slightly.  With the SPX/OEX back at
levels where I was looking for resistance and a bullish target
for this current rebound, I'm monitoring the BIX.X for resistance
tomorrow at/near the 305 level, and would think the BIX.X hard
pressed to reach much above its WEEKLY R1 and MONTHLY Pivot near
308.

The bond market didn't have the additional hour of trade that
equities did, and that's when the bulk of today's gains took
place for the major averages.  Should bonds open "flat" tomorrow,
an equity trader might look for stock to show modest bullish
gains in the early going.

While the week is young, the 10-year YIELD has traded in a rather
tight YIELD range of 4.4% to 4.3%, perhaps giving equity sellers
little reason to sell stocks the past couple of days, but looking
for rally points in what I consider a still range-bound market.

S&P 500 Index Chart - Daily Interval



Option expiration is quickly approaching (this Friday) and
today's declining Market Volatility Index (VIX.X) 20.21 -5.4%
back below the 21.22 level (I like to place a retracement on the
VIX.X from 40.00 to 16.78) after seeing a VIX.X test of 25.66
last week (when the SPX just recently traded 963) gives the
impression some near-term put holders may be looking back higher
at 1,000 near-term and are rushing to close out some long puts.
I say this because I (Jeff Bailey) wouldn't be rushing to
establish new call positions here.

I would perhaps associate the BIX.X 305 with SPX 995 right now
(add some further tech strength) and BIX.X 308 back near SPX
1,000.

I'm no over relying on Stochastics to immediately reverse lower,
but looking for something closer to a few days of consolidation,
and choppy trade before we ease back to the lower end of the
range.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a
net gain of 2 stocks to point and figure buy signals.  This has
the bullish % still "bull correction" status at 74.00%, after
reading 73.40% late last week.  It would currently take a lower
reading at 68% to achieve "bear alert" status, and a reversal
high reading of 80% to get back into "bull confirmed" status.

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



While the indices may indeed see some choppy trade into this
week's expiration, today's continued rally from the 485 lows
brings the OEX right back to what I would consider the apex of a
wedge the OEX had been building back in July, which points right
to the psychological 500 level.

One thing I made note of recently with the VIX.X was that little
spike up to 25.66 last week, when the OEX traded this recent low
of 485.  That little spike up in the VIX.X is what has me now
alert to a potential change in sentiment of institutions where
they might be more apt to sell OEX 405 calls and hedge some
inventory with OEX 485 puts.  This type of options strategy isn't
necessarily appropriate for every individual trader that doesn't
have the stock inventory to hedge or deliver long against the
naked call portion of the trade, but may be a mindset that I'm in
that is a little more defensive.

Today's trade saw no net change in the narrower S&P 100 Bullish %
($BPOEX) and remains "bull confirmed" at 80% for a fourth-
straight session.  It would currently take a reading of 78% to
reverse into "bull correction" like the broader S&P 500 Bullish %
did just recently.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval



I wouldn't say the QQQ "blew through" its WEEKLY pivot of $30.64
and I mentioned there were some sellers there just after the FOMC
announcement when the Q's made their session highs.  However, the
intra-day pullback from that selling sure as heck found the
buyers lined up at $30.45 and multiple buy program alerts that
followed got the QQQ moving into the close.

Dell Computer (NASDAQ:DELL) $31.77 +2.38% reports quarterly
earnings after Thursday's close of trade and marks the last of
"big tech" earnings.

Today's trade saw no net change in the NASDAQ-100 Bullish %
($BPNDX) and still holds at "bear confirmed" status and 64% for a
third-straight session.

Dow Industrials Chart - Daily Interval



If there's one major index right now that makes a bear a little
jittery, it has to be the Dow Industrials (INDU), which look to
challenge the 9,340 level for a third-time.  It has always been a
very tough trade for me personally to put/short a stock or index
that trades back near a high, with little overhead supply.

However, I do think for a bearish trade setup, look for
resistance at the 9,340 area, but put/short weakness back below
near-term.  I will admit I was looking for the Dow to stall out
right in here, but not test the WEEKLY R2 of 9,344.46 and perhaps
this is what has the bearish side of me a little jittery yet
again.  In a range-bound trade Stochs have marked near-term tops,
but the pullbacks have been finding 9,000 support.

Today's trade saw no net change in the very narrow Dow
Industrials Bullish % ($BPINDU) and still remains "bull
correction" status at 80% for a eighth-strait session.

Jeff Bailey


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


Volume patterns
Jonathan Levinson

Today saw impressive upside fireworks from the bulls following
the requisite post-FOMC uncertainty.  The indices, which had
traded sideways until 2:15, dipped and then launched nearly
vertical rallies.  A brief pause and pullback was followed by a
second vertical move into the close.

The Dow is now up 5 sessions in a row, and the chart appears very
bullish.  However, volume is falling off on a daily basis, with
today's volume the lowest of the current rally.  The reason for
today's drop in volume, FOMC uncertainty, is reassuring to bulls
because of its non-recurrence for many weeks to come.   However,
the net effect is the same, namely a lack of strength at current
levels.

Traders pay close attention to "gaps" in the price charts,
because gaps have a tendency to fill.  The reason is that a gap
involves a sudden move in which volume is so low that no trades
execute as price lurches to its new level.  The implication is
that should price return to the gap level, there are no buyers or
sellers committed to the level in advance, and price has a
tendency to fill the gap.

Low volume sessions are a step closer to gaps, in that support is
relatively weak on low volume upside days, just as resistance is
weak on low volume downside days.  Bulls will want to see plenty
more buyers committing to current levels in order to reinforce
today's gains.  However, the tendency of volume to drop on each
successive upside day for the past week demonstrates a lack of
enthusiasm at higher prices, and implies that the current up-move
is corrective.  If volume does not accelerate with an upward
movement in price, the current gains will remain dubious.


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

Market Averages

DJIA ($INDU)

52-week High:  9361
52-week Low :  7197
Current     :  9310

Moving Averages:
(Simple)

 10-dma: 9171
 50-dma: 9136
200-dma: 8556



S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     :  990

Moving Averages:
(Simple)

 10-dma:  979
 50-dma:  988
200-dma:  913





Nasdaq-100 ($NDX)

52-week High: 1316
52-week Low :  795
Current     : 1240

Moving Averages:
(Simple)

 10-dma: 1240
 50-dma: 1241
200-dma: 1097




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

As would be expected the volatility indices or "fear" indices have
fallen the last several sessions just as the $INDU, SPX and OEX have
rallied the last four-to-five sessions.  Climbing equity prices
means investors have less and less fear which makes them complacent
and vulnerable to the next move, which is typically lower.  The VIX
is back at 20 again.  It is the "magic" level, which should flash a big
bright warning sign to traders: potential market top in the making!

CBOE Market Volatility Index (VIX) = 20.21 –1.21
Nasdaq-100 Volatility Index  (VXN) = 30.21 –1.91


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.77        614,537       470,794
Equity Only    0.50        443,018       221,049
OEX            1.26         31,363        39,433
QQQ            0.71         25,820        18,419


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

Bullish Percent Data

           Current   Change   Status
NYSE          68.2    + 0     Bull Confirmed
NASDAQ-100    64.0    + 0     Bear Confirmed
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       74.0    + 0     Bull Correction
S&P 100       80.0    + 0     Bull Confirmed


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

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

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

 5-Day Arms Index  0.85
10-Day Arms Index  1.04
21-Day Arms Index  1.00
55-Day Arms Index  1.10


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

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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    2008      2096
Decliners     803       965

New Highs     113       108
New Lows       11         9

Up Volume   1009M     1099M
Down Vol.    321M      205M

Total Vol.  1346M     1321M
M = millions


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

Commitments Of Traders Report: 08/05/03

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

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

S&P 500

Commercial traders appear to be pruning some long positions and
moving that money to the short side.  As expected we see just
the opposite from the small trader.


Commercials   Long      Short      Net     % Of OI
07/15/03      414,020   453,033   (39,013)   (4.5%)
07/22/03      411,206   442,131   (30,925)   (3.6%)
07/29/03      405,429   445,114   (39,685)   (4.7%)
08/05/03      395,633   450,988   (55,353)   (6.5%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   18,486  -  6/17/03

Small Traders Long      Short      Net     % of OI
07/15/03      148,716    70,279    78,437    35.8%
07/22/03      155,891    76,466    79,425    34.2%
07/29/03      155,216    73,030    82,186    36.0%
08/05/03      159,971    72,951    87,020    37.4%

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


E-MINI S&P 500

The bulls in the commercial group continue to add to their
positions here but we did see an increase in short positions
as well.  This is the most bullish the commercials have been
in quite some time.  Meanwhile the large spread between longs
and shorts for the small traders narrowed a bit.


Commercials   Long      Short      Net     % Of OI
07/15/03      214,274   218,765    ( 4,491)  ( 1.0%)
07/22/03      249,392   249,386          6     0.0%
07/29/03      272,659   216,166     56,493    11.6%
08/05/03      310,662   249,004     61,658    11.0%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:   61,658   - 08/05/03

Small Traders Long      Short      Net     % of OI
07/15/03       45,372    54,654    (9,282)   (9.3%)
07/22/03       45,945    76,071   (30,126)  (24.7%)
07/29/03       44,437    93,144   (48,707)  (35.4%)
08/05/03       56,663    95,919   (39,256)  (25.7%)

Most bearish reading of the year: (48,707)  - 07/29/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

"Smart" money didn't do much last week as positions remain
relatively the same but we saw some small traders eliminate
a few long positions in the NDX.


Commercials   Long      Short      Net     % of OI
07/15/03       28,467     49,154   (20,687) (26.7%)
07/22/03       32,502     48,139   (15,637) (19.4%)
07/29/03       31,456     50,294   (18,838) (23.0%)
08/05/03       32,813     52,383   (19,570) (23.0%)

Most bearish reading of the year: (20,687)  - 07/15/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
07/15/03       26,489     8,004    18,485    53.6%
07/22/03       27,321     8,844    18,477    51.1%
07/29/03       25,691     7,810    17,881    53.4%
08/05/03       22,188     7,783    14,405    48.1%

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

DOW JONES INDUSTRIAL

More shades of limbo here as well with the commercials
not making any new commitments and the small traders
holding steady going on a month now.


Commercials   Long      Short      Net     % of OI
07/15/03       21,607     7,855   13,752      46.7%
07/22/03       22,198     8,176   14,022      46.2%
07/29/03       23,696     9,572   14,124      42.5%
08/05/03       23,981     9,264   14,717      44.3%

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

Small Traders  Long      Short     Net     % of OI
07/15/03        5,475     9,717   (4,242)   (27.9%)
07/22/03        6,110    10,898   (4,788)   (28.2%)
07/29/03        5,744    11,601   (5,857)   (33.8%)
08/05/03        5,716    10,422   (4,706)   (29.2%)

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



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The Option Investor Newsletter                  Tuesday 08-12-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: FRE
Call Play Updates: KSS, LLL, PCAR, STJ,
New Calls Plays: EBAY
Put Play Updates: BDK, FITB, IBM, KLAC, PGR, YHOO
New Put Plays: None


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

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


CALLS:
*****

None


PUTS:
*****

Freddie Mac - FRE - close: 50.43 change: +0.60 stop: 50.25

Despite the bearish look on the charts, our FRE play just
couldn't get any downside momentum going and the $48 level proved
to be too strong of resistance for the bears to overcome.  The
stock rebounded tentatively last week, but we saw danger signs
building as FRE managed to close above the 10-dma throughout the
latter half of last week.  Monday's action looked mildly bullish
as well, with a close just under the pivotal $50 level.  Sure
enough, the stock gapped up this morning, quickly moving through
$50 and triggering our $50.25 stop early in the session.  Just to
remove any doubt that the downtrend had been broken, FRE came
back from its midday slump to close near its high of the day and
above our stop.  Clearly we're dropping the play tonight and
chalking it up as a play that just never really worked in our
favor.

Picked on July 22nd at    $50.33
Change since picked:       +0.10
Earnings Date           07/15/03 (confirmed)
Average Daily Volume =  7.47 mln




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

Kohl's Corp. - KSS - close: 61.49 change: +1.24 stop: 59.75*new*

Just when our KSS play seems to be gaining some upside traction,
we can hear the fat lady warming up backstage.  Everything on the
charts looks favorable for further upside gains and today's close
above $61 only solidifies that view.  Taken together with the
Retail index (RLX.X) tacking on another 1.80% and breaking out to
new highs for the year, KSS looks like it could continue to run
higher through the remainder of the week.  The problem is
earnings, and KSS is due to release its numbers on Thursday after
the closing bell.  That means there are exactly 2 more sessions
for the upside move to reach its conclusion before we need to
have any open positions closed.  While we'll officially be
closing the play tomorrow, consider this your heads up to start
looking for a profitable exit point from the play.  An early
surge near $62.50 tomorrow might be just the ticket.  In any
case, stops should now be raised to $59.75, just below
yesterday's intraday low and just above break even from our
picked price.

Picked on July 31st at    $59.35
Change since picked:       +2.14
Earnings Date           08/14/03 (confirmed)
Average Daily Volume =  4.39 mln



---

L-3 Communications -LLL - close: 48.82 change: +0.92 stop: 47.25

Back from the brink, LLL finally caught a bit of a lift on
Tuesday and surged higher with the rest of the market, ending at
its high of the day.  More encouraging is the fact that the stock
closed back over the 10-dma (currently $48.63) and looks to be
headed for another rendezvous with the $50 resistance area.
Aggressive traders that bought the rebound off the 20-dma (now at
$47.54) likely got a solid entry point, and things are shaping up
with daily Stochastics now turned upward after just kissing the
oversold region.  New entries look favorable on a rally above
$48.90 (just above today's intraday high), although conservative
traders may want to revert back to the initial action plan, which
was to wait for a rally through $50.50 before entry.  LLL is
likely to see initial resistance in the $52.0052.50 area, which
will make a good initial target for conservative traders to
harvest some gains.  But if this train really gets rolling, a
visit of the $55 area is still in play.

Picked on August 3rd at    $49.90
Change since picked:        -1.08
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      957 K



---

PACCAR - PCAR - close: 79.39 change: +0.89 stop: 73.99 *new*

Our relative strength play in shares of truck and truck parts
manufacturer PCAR is working out well.  The stock appears to have
finished consolidating above old resistance of $75 and we're now
seeing a short series of higher lows.  PCAR is setting up for a
new breakout over current resistance of $80.00.  Momentum traders
might want to wait for the move over $80 before initiating new
positions.  Chart readers will also note that the 10-dma appears
to be offering some support.  It would be nice to see a little
more volume on the climb higher but given the late summer trading
sessions low volume is expected.  Stronger volume on any breakout
to the upside would certainly be confidence building for the
bulls.  We are going to raise our stop by $1.00 to $73.99.  More
conservative traders might want to consider upping their stop
towards the $76 mark, a level not seen for several sessions.

Picked on July 31 at $77.24
Change since picked:  +2.15
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:  1.15 million



---

St. Jude Medical - STJ - cls: 56.24 chng: +0.74 stop: 53.50*new*

After a failure to hold above the $56 level last Friday, shares
of STJ got a solid boost to start out the week on Monday as the
stock pushed up to close just below the 50-dma.  That looked like
the precursor to a breakout move and the bulls delivered today
propelling the price through our $56.05 trigger shortly after the
open enroute to the day's high at $56.75.  That was the entry
point for momentum traders and those with a more cautious bent
got their chance later in the day after STJ pulled back to find
support near $55.75 before working higher into the closing bell.
Today's close looks particularly encouraging because of the close
over both the 50-dma ($55.72) and $56 resistance.  It would have
been nice to see stronger volume accompany the breakout, but
we're willing to cut the stock some slack, given the light volume
across the broad market.  Another dip and rebound from the
$55.00-55.50 area looks like the best we're likely to see for
secondary entry points, with the anticipated breakout now
underway.  Our initial upside target remains in the $59-60 area,
the site of the dual gaps in June.  But the first obstacle to
getting there will be to trade $57, which will generate a new PnF
Buy signal.  Following this week's bullish start, it should now
be safe to raise stops to $53.50, which is the site of last
week's closing lows.

Picked on August 10th at   $54.23
Change since picked:        +2.01
Earnings Date            10/15/03 (unconfirmed)
Average Daily Volume =   2.19 mln



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

eBay, Inc. - EBAY - close: 103.43 change: +1.57 stop: 99.50

Company Description:
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in the
United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Why we like it:
During the latest round of profit taking, Technology stocks felt
the brunt of the pain, largely due to the outsized gains they
have enjoyed since the bottom in March.  But over the past 2
days, Technology has been in favor again, and even the richly
valued Internet stocks are seeing the buyers return.  It may seem
strange to list a bullish play on EBAY while we've got a bearish
play going on fellow Internet stock YHOO, but there's more than
meets the eye.  For starters, YHOO recently generated a PnF Sell
signal, while EBAY refused to do so.  In fact shares of this
online auction house have pulled back right into strong support
near $100, consolidated and put on a nice bullish move over the
past 2 sessions, just enough to drag the daily Stochastics out of
oversold, while MACD hinges upward ever-so-slightly.  Just on a
relative strength basis, EBAY looks like the best way to play
bullish on the Internet sector, and provides a nice hedge to our
bearish YHOO profile.  Another point of strength is the long-term
ascending trendline from the October lows.  EBAY dipped below it
on Friday, recovered its footing yesterday and appears to be
starting a new bullish leg.  Redrawing the ascending trendline,
taking into account Friday's low of $99.74 give us a trendline
now resting at $100.25.

Oh, did we mention that EBAY is set to split its shares 2-for-1
on August 29th?  That's right, this play brings with it the old-
fashioned prospect of a split run over the next couple weeks.
While we aren't looking for new highs between now and the end of
the month, a run to the $110 level looks like a pretty safe bet,
so long as the rest of the market doesn't implode.  Market
permitting, we could even see EBAY back up near the $115 level
before that split date rolls around.  The $104 level was a strong
level of resistance on the way up in June and once broken, it led
to a strong breakout.  We're betting on the same sort of action
this time as well, so momentum entries look favorable on a
breakout over $104.  On the other side of the coin, with strong
support lying just below, an intraday dip into the $101-102 area
could provide a slightly better entry ahead of the expected run.
We're initiating coverage with our stop at $99.50, as a break
below that level would be a clear and unwelcome bearish
development.

Suggested Options:
Shorter Term: The September 105 Call will offer short-term
traders the best return on an immediate move, as it is the
closest to being in the money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 110 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 will want to use the October 105 Call.

BUY CALL SEP-100 QXB-IT OI=2105 at $6.50 SL=4.50
BUY CALL SEP-105 QXB-IA OI=5729 at $3.80 SL=2.25
BUY CALL OCT-105 QXB-JA OI=6017 at $5.80 SL=3.75
BUY CALL OCT-110 QXB-JB OI=4058 at $3.80 SL=2.25

Annotated Chart of EBAY:



Picked on August 12th at   $103.43
Change since picked:         +0.00
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =    6.78 mln




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

Black & Decker - BDK - cls: 40.44 chg: +0.53 stop: 41.01

Grrrr... our BDK play continues to slowly move against us.  We
correctly predicted the move down from $41 towards the $38 level.
We also predicted the bounce near $38.  Unfortunately, the big
move on Friday was a surprise.  We considered closing the play
when BDK closed back over the $40 mark but suspected the move was
just some shorts covering ahead of the weekend.  Monday's
performance looked a little better as shares closed back below
$40 even after news that the FTC had approved the BDK/Masco tool
acquisition.  Last month BDK said it would buy the Baldwin
Hardware and Weiser Lock businesses from Masco.  Now that the FTC
has granted early termination to its antitrust waiting period the
only thing standing between the sale are final purchase
agreements and board approvals (Reuters).  With today's bounce we
strongly considered closing the play again but two things
suggested we stick it out.  The Dow Jones Industrials are once
again right at the critical 9300 level.  After five up days in a
row it's due for a pull back.  Granted it did close above the
9300 mark but that could be an overreaction to the FOMC news.
Secondly, shares of BDK are still below its simple 200-dma and
previous support - now resistance of $41.  If there is a last
chance for a roll over this is it.  Per our update on Sunday we
are not suggesting new bearish plays in BDK at this time.

Picked on August 4 at $39.99
Change since picked:   +0.45
Earnings Date       07/24/03 (confirmed)
Average Daily Volume:   731  thousand



---

Fifth Third Bancorp - FITB - cls: 54.39 chg: +1.35 stop: 55.01

Death by slow torture.  That's what our bearish play in FITB is
beginning to feel like.  We'll get a move down and then the stock
will churn sideways to slightly up in a bear flag pattern.  The
recent strength we've seen in the BIX and BKX banking indices
hasn't helped us any either.  Despite our frustration at the
speed of this play the action in FITB is holding true to form
thus far.  The last several weeks have shown a pattern of bear
flags that breakdown inside its descending channel.  The stock is
near the upper border of that descending channel so we're due for
a break.  The question is which direction?  The stock still has
plenty of resistance between $54.50 and $55.00 (plus it's simple
200-dma just above $55) but we've tightened our stop down to
$55.01 so we need to see a rollover soon.  The bad news is that
the BKX, while still under overhead resistance of 900, just broke
back above its 50-dma and the 880 level and it looks ready to
retest the 900 mark.  Such a move could inspire another rally
attempt in FITB.  We are not suggesting new plays in FITB at this
time.

Picked on July 17th at $55.26
Change since picked:    -0.87
Earnings Date        07/15/03 (confirmed)
Average Daily Volume =    2.4 million



---


Intl Business Mach - IBM - cls: 81.51 chg: +0.49 stop: 82.51

Is it possible?  The Dow Jones Industrial Average has rallied
almost 280 points off its Wednesday, August 6th low all the while
shares of IBM, one of its components, has been unable to bounce
back through resistance at $81.55 and $82.00 (its simple 200-
dma).  Of course the answer is yes.  Shares of Big Blue may look
a little oversold and several of its indicators certainly look a
little bullish but no one is willing to bite.  Don't get us
wrong, the stock has bounced from its low near $79 last week but
the bounce has been tepid and on low volume.  The challenge here
is your perspective.  If you were bullish on IBM you'd probably
point to the short-term series of higher lows and its position
above support of $80.  We can't argue with that and that's why we
are not suggesting any new bearish positions on the stock until
it trades back below $80.  Given that IBM does have its own
semiconductor division we were curious to see if AMAT's or MXIM's
earnings tonight would produce any movement in IBM.  So far they
haven't.  A bigger event could be DELL's earnings report on
Thursday and what DELL has to say about hardware sales.

Picked on August 5 at $79.85
Change since picked:   +1.66
Earnings Date       07/16/03 (confirmed)
Average Daily Volume:   8.2  million



---


KLA-Tencor - KLAC - close: 49.60 change: +0.47 stop: 50.05

Bears must be pulling their hair out (like us).  Last week we saw
the chip sector fade past its rising support at the 50-dma.
Friday's big loss in the group merely confirmed the breakdown and
the SOX appeared headed for a test of support near 350.  This
week has brought with it two days of bouncing for the group and
the affect has not been lost on KLAC.  The SOX bounced back to
its 50-dma while shares of KLAC have bounced back above the 50-
dma.  Shares of KLAC are still under the $50 mark but we have a
tight stop at $50.05 and could be stopped out tomorrow.  Which
would be a surprise given Applied Material's less than exciting
earnings report after the closing bell this evening.  AMAT beat
the headline number by a penny on slightly less revenues.  The
company took a 7-cent write off for inventory, staff and plant
"consolidation".  AMAT's stock was trading lower in after hours
while its management was trying to put a good spin on the report
and their outlook for the future.  We would not suggest any new
bearish plays on KLAC at this time.

Picked on August 10 at $48.04
Change since picked:    +1.56
Earnings Date        07/24/03 (confirmed)
Average Daily Volume:     9.6  million



---

Progressive Corp - PGR - cls: 65.28 chg: +0.44 stop: 66.01 *new*

We're thinking maybe it's time to call it quits on PGR too.  The
IUX insurance index is bouncing higher with the Industrials just
like everything else.  The positive sector makes it hard even for
a relative weakness play like PGR to produce any follow through
(to the downside).  It would take a lot of faith to short the
stock with nearly all of its technical indicators pointing upward
suggesting bullish momentum.  The stock's inability to produce
any follow through on a breakdown below support is frustrating
and just eats up our option premium.  A move under $64.25 might
work for a momentum entry but more patient traders might want to
look for yet another failed rally, this time at $65.75.
Actually, the $65.75 might be a good level for more conservative
traders to place their stop loss.  The stock hasn't traded above
that mark since the first of August.  Should the Industrials
follow through on this push above the 9300 level we might just
cut this one loose.  We are going to cinch our stop loss down to
$66.01.

Picked on July 23 at $65.22
Change since picked:  +0.06
Earnings Date      07/16/03 (confirmed)
Average Daily Volume:  941  thousand



---

Yahoo! Inc. - YHOO - close: 29.85 change: +0.95 stop: 31.50

Internet stocks saw a solid revival on Tuesday, with the CBOE
Internet index (INX.X) extending yesterday's rebound off of
strong support in the $130-132 area.  As one of the leading
stocks in the sector, it is no surprise to see the stock catching
a solid rebound as well.  But the 3.28% gain is enough to make a
bear's stomach churn, especially with volume looking a bit
stronger than it has been over the past several sessions.  Daily
Stochastics are now turned up and it looks like we're going to
get a solid test of overhead resistance to find out if the recent
breakdown under the $30 level was real or a bear trap.  While a
rollover at $30 (also the site of the 10-dma) may be an
acceptable aggressive entry point tomorrow, the more critical
level to watch will be closer to $30.50-31.00, the site of former
support, which is reinforced by the falling 20-dma ($30.85).
That may be the better place to enter the play on a rollover,
especially since there is close strong resistance at the 50-dma
($31.28).  Maintain stops just above the 50-dma at $31.50.

Picked on August 7th at   $28.87
Change since picked:       +0.98
Earnings Date           10/08/03 (unconfirmed)
Average Daily Volume =  13.4 mln




*************
NEW PUT PLAYS
*************

None



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**********

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The Option Investor Newsletter                  Tuesday 08-12-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: EBAY
Futures Corner: Adding More Filters to the ADX System


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

eBay, Inc. - EBAY - close: 103.43 change: +1.57 stop: 99.50

Company Description:
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in the
United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Why we like it:
During the latest round of profit taking, Technology stocks felt
the brunt of the pain, largely due to the outsized gains they
have enjoyed since the bottom in March.  But over the past 2
days, Technology has been in favor again, and even the richly
valued Internet stocks are seeing the buyers return.  It may seem
strange to list a bullish play on EBAY while we've got a bearish
play going on fellow Internet stock YHOO, but there's more than
meets the eye.  For starters, YHOO recently generated a PnF Sell
signal, while EBAY refused to do so.  In fact shares of this
online auction house have pulled back right into strong support
near $100, consolidated and put on a nice bullish move over the
past 2 sessions, just enough to drag the daily Stochastics out of
oversold, while MACD hinges upward ever-so-slightly.  Just on a
relative strength basis, EBAY looks like the best way to play
bullish on the Internet sector, and provides a nice hedge to our
bearish YHOO profile.  Another point of strength is the long-term
ascending trendline from the October lows.  EBAY dipped below it
on Friday, recovered its footing yesterday and appears to be
starting a new bullish leg.  Redrawing the ascending trendline,
taking into account Friday's low of $99.74 give us a trendline
now resting at $100.25.

Oh, did we mention that EBAY is set to split its shares 2-for-1
on August 29th?  That's right, this play brings with it the old-
fashioned prospect of a split run over the next couple weeks.
While we aren't looking for new highs between now and the end of
the month, a run to the $110 level looks like a pretty safe bet,
so long as the rest of the market doesn't implode.  Market
permitting, we could even see EBAY back up near the $115 level
before that split date rolls around.  The $104 level was a strong
level of resistance on the way up in June and once broken, it led
to a strong breakout.  We're betting on the same sort of action
this time as well, so momentum entries look favorable on a
breakout over $104.  On the other side of the coin, with strong
support lying just below, an intraday dip into the $101-102 area
could provide a slightly better entry ahead of the expected run.
We're initiating coverage with our stop at $99.50, as a break
below that level would be a clear and unwelcome bearish
development.

Suggested Options:
Shorter Term: The September 105 Call will offer short-term
traders the best return on an immediate move, as it is the
closest to being in the money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 110 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 will want to use the October 105 Call.

BUY CALL SEP-100 QXB-IT OI=2105 at $6.50 SL=4.50
BUY CALL SEP-105 QXB-IA OI=5729 at $3.80 SL=2.25
BUY CALL OCT-105 QXB-JA OI=6017 at $5.80 SL=3.75
BUY CALL OCT-110 QXB-JB OI=4058 at $3.80 SL=2.25

Annotated Chart of EBAY:



Picked on August 12th at   $103.43
Change since picked:         +0.00
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =    6.78 mln




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**************
FUTURES CORNER
**************

Adding More Filters to the ADX System

A couple of days ago Jim mentioned that my ADX strategy did not
look at breadth indicators before taking a trade and that got me
to thinking, couldn't I add them to the ADX strategy and see if
the overall results improved. There are many rticles that come to
mind though about not over optimizing a strategy but as Jim lso
mentioned my strategy is based on some pretty simple indicators.
It uses ADX o identify a trend then a full 5-minute bar trading
under or over the 11 MA to dentify a pull back and buy or sell
when the trend resumes. Simple to understand, simple to trade but
could I get better profits if I added a breadth filter?

Let's find out. But first of all I need to explain what I used as
a breadth indicator and how I conducted the tests.

I decided to use the A/D line for issues I programmed because it
gives me positive and negative values and a 0 line, the A/D line
in Tradestation plots an absolute value. The indicator is plotted
from the following formula:

A/D line = Advancing Issues - Declining Issues.

I have defined strength in the A/D line as a number over 0 and
weakness as a number under 0.

Now we need a frame of reference. Here is the image I showed in
the Market Monitor on Monday for the ADX system as it stands.
From my previous articles you know that the most important number
is the BLUE box, the Profit Factor and the next most is the
MAGENTA box the Percent Profitable. There are many more
comparisons you could be making but comparing these numbers will
give you an idea if the breadth filter is adding or subtracting
from the strategy.

These numbers are already very good for a daytrading system.




My first test was to see what would happen to the Profit Factor
and the Percent Profitable if we only took LONG signals while the
A/D line was exhibiting strength and only SHORT signals while the
A/D line was exhibiting weakness. Here are the results.






You can see that the number of total trades decreased from 118 to
107 not a great deal. I would have expected a larger decline with
this filter. But the interesting part is the Profit Factor
decreased from 1.5 to 1.2 and the percent profitable decreased
from 55% to 44% for all trades. also the Profit Factor for longs
decreased from 1.34 to 1.05 and from 1.8 to 1.52 for SHORT
trades. I really didn't expect to see this drop.

Ok this is not all that good. Maybe we need to tighten up our
definition of strength and weakness. What would happen if breadth
strength were defined as an A/D number over 0 AND rising and
breadth weakness as a number under 0 AND falling? This would, of
course, involve a definition of rising and falling. Here is how I
defined it. If the current A/D number is greater than the A/D
number 10 bars ago the A/D line is rising. If the current A/D
number is less than the A/D number 10 bars ago the A/D line is
falling.

Here are the results from that test.




A little bit better than using only the A/D under or over 0 but
the number of trades falls to 35 and results still not as good as
the original. Looking at the Profit Factor only the Long and
Short trades were evened out better, in fact better for longs but
worse for shorts. But the number that sticks out to me is the
Percent Profitable. Remember when I was talking about this number
in my previous articles; a number under 50% could be
psychologically hard to follow because you are losing more trades
than you are winning.

All in all I was quite disappointed by this test because I truly
thought we could mprove the results, probably trade less but
trade more profitably.

So back to the drawing board and more testing. Do you remember
when I first started in the Market Monitor and I was always
jawboning about not trading in the No Trade Zone, 11:30 - 2:30? I
decided to test this theory and added the code time < 1130 and
time > 1430.  Here are the results.





By Jove I think I have something. The number of trades suffers so
for those who like to trade daily this is probably not good news,
for this system trades on an average, 63/12=5.25 times per month.
But for me it is because I like to make money more than I like to
trade and these are very very good results.

One of the things that bothered me about the ADX-5 system as it
stands was the equity curve. You probably remember from my other
articles that you want to see a smooth equity curve like you have
with the ADX-20 system. The ADX-5's equity curve was OK but
within the last few months had flattened out. This bothered me.

Here is the equity curve for the ADX-5 with the time filter.



This is a smooth equity curve except for the trades from 13 to
about 18. What was going on here? Trying to figure it out I
checked the Trades List page and the Trade Analysis page and
noticed that once this system had 4 consecutive loses in a row.





These losses were trades 14 thru 17, which brought the equity
curve down as far as it did but notice that it has be only up
since then.

All in all I really like what I have found.

What I have decided to do is continue to trade the ADX-5 system
throughout the No Trade Zone for those who want to take the
signals and leave it up to the individual trader to take the
trade or not.

Remember Plan the Trade and Trade the Plan

Jane


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