Option Investor

Daily Newsletter, Sunday, 08/24/2003

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The Option Investor Newsletter                   Sunday 08-24-2003
Copyright 2003, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: The Music Stopped
Futures Market: Doji Day
Index Trader Wrap: INTEL MY BELL
Editor's Plays: Will History Repeat?
Market Sentiment: About-Face
Ask the Analyst: Mortgage rates, refinancing and Treasury yields
Coming Events: Earnings, Splits, Economic Events

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 8-22         WE 8-15         WE 8-08         WE 8-01
DOW     9348.87 + 27.18 9321.69 +130.60 9191.09 + 37.12 -130.60
Nasdaq  1765,32 + 63.31 1702.01 + 57.98 1644.03 - 71.59 - 15.08
S&P-100  497.42 -  0.88  498.30 +  4.50  493.80 +  0.16 -  9.30
S&P-500  993.06 +  2.39  990.67 + 13.08  977.59 -  2.56 - 18.53
W5000   9612.43 + 64.92 9547.51 +154.78 9392.73 - 61.43 -145.20
RUT      485.51 + 13.59  471.92 + 17.98  453.94 - 14.14 -  0.80
TRAN    2641.56 + 17.90 2623.66 + 44.63 2579.03 - 16.88 - 19.88
VIX       20.27 +  0.07   20.20 -  1.09   21.29 -  1.49 +  2.84
VXN       29.47 +  0.26   29.21 -  2.82   32.03 -  0.45 +  2.44
TRIN       1.36            1.01            0.87            1.08
Put/Call   0.91            0.53            0.81            0.91
Avg Highs   720             338             189             462
Avg Lows     58              62              86              72

The Music Stopped
by Jim Brown

If you read my wrap from Thursday night you know what the title
means. The move to the sidelines was orderly and patient but it
was persistent. The difference in sentiment between the open and
the close was as different as night an day but in reality nothing
changed. The Nasdaq dropped -46 points from its morning high but
only ended down -12 points for the day and up +63 for the week.
Yes, it was a dramatic move but all things considered it meant

Economically the day was a dud. The ECRI (the who cares report)
was flat again at 127.6. The only material change was in the 6mo
growth rate which fell to 12.7 from last weeks 13.2. No big deal
here. Cooling home sales and rising interest rates are dampening
the growth in this index.

The only other report was the Internet E-Commerce Sales for Q2.
It came in at $12.48 billion and up from $11.93 billion in Q1.
Sales were up +27.8% from Q2-2002. While dollar volume is rising
the percentage of Internet sales to all sales is dropping slightly.
It was 1.59% in the 4Q-2002 and fell to 1.45% in Q2. Most analysts
had expected sales volume to drop instead of rise but the overall
impact of the report was negligible.

Nobody cared about the economics because Intel surprised everyone
by raising guidance before the open. Futures rocketed from 1002
to 1012 between 8:30 and 9:30. The markets opened up at new highs
with Intel in both the Dow and the Nasdaq. The Dow raced to touch
9499.97 and a level not seen since June-20th 2002. Weekly levels
of resistance were blown away in a few ticks but the index fell
03 short of touching the electric fence at 9500. The Nasdaq hit
1812 and a level not seen since April-19th 2002. The sun was
shining, birds were singing and everybody was praising Abby Cohen
and her latest earnings upgrade for the S&P. That all happened
before 10:AM.

When the clock struck 10:00 the bull's tech express turned into
a pumpkin and the wheels quickly fell off the rally. I say this
only tongue in cheek because nothing has really changed. The
drop from the highs of the day was dramatic but it occurred
on low volume and it was very orderly. Decliners beat advancers
2:1 but new highs still hit 721 and new lows only 53. The VIX
was not off or under the scale with a low of 19.41 but it has
climbed for four days from its 19.06 low on Monday. No news
there. So what derailed the tech express in light of the Intel

Intel itself was the primary cause of the change in sentiment.
Intel CEO Craig Barrett went on record Thursday by saying they
were seeing some selective buying in PCs but he qualified it
with "We're not seeing a big upgrade cycle and we're not seeing
IT budgets being raised." Ok, we can all buy that and thank you
for the clarification. He knew what was coming and wanted to
blunt the reaction. Friday morning Intel raised revenue estimates
from +6% growth to +11% growth for the quarter over last year
and raised the gross margin to 56% from 54%. The new $7.55B
estimate was higher than the consensus estimates of $7.24B by
about $300M. The margin gains are being fueled by a move to the
higher end products like chips for notebooks and servers. We
have heard from Dell, HPQ and GTW that PC sales are soft with
the only consumer interest in laptops. Servers are so cheap
that companies are beginning to selectively upgrade but the real
key was the stronger than expected back to school bounce.

Consumers are taking their tax checks and refi funds and buying
new computers for students. Intel said they did not see it
coming because of the very low visibility in the market. Also
helping them is the price war between Dell, HPQ and the white
box makers. The prices are so low for the commodity PC that
retail buyers are being lured into the back to school market
where they would not have ventured before. The $499 computer
is flooding the market and the only winner is Intel. The box
makers all buy the same chips and they are cutting their throat
on the sell side to keep the volume up. You can imagine Intel's
delight to see the chips flowing out the door like cocaine to
street dealers. There is no profit in the food chain unless you
are at the top and everybody is continuing to deal just to
support their habits.

Intel said other chips remain soft and Andy Bryant tried to tone
down the excitement with several well placed comments. He said
it is unclear if the unexpected bounce in the early part of the
quarter would continue in the coming weeks. He said their chip
plants were running at nearly full capacity and they were
experiencing some shortages. That is a problem he would love to
face in light of some plant closings over the last couple years.
They are leaner now and shortages would keep prices up. Part of
the higher margin guidance is because they have not lowered
their prices this quarter. This is a good sign that they do not
feel pressured by lack of demand.

So what caused the sell off? On the conference call Intel refused
to give any specific guidance or answer any pointed questions.
They said the bounce might only be a temporary result of the Dell
price war in anticipation of back to school sales. There was some
veiled rumors that it was the result of some channel stuffing
and volume requirements of dealers to get decent prices. They
repeated the claim that IT spending was not improving and they
had limited visibility going forward. Considering they just
raised guidance the conference call was anything but bullish.
They raised our hopes and then popped our balloon. However it
was not the first time this year for this to happen. In June
Intel raised guidance with the following comment. "The company's
Intel Architecture business is trending to the high end of the
normal seasonal pattern while demand for communications products
remains soft. All other expectations are unchanged". With that
comment Intel gapped open and capped the end of a two week
rally. In March Intel saw the exact same bounce into the
guidance statement only they guided to the lower end of the
range. The bottom line here is that it does not seem to make
any difference what they say. The smart money has already
bought the rumor and they sell the announcement. Note the
SOX chart shows an even more drastic reaction to the Intel

Intel Chart

SOX Chart

On the trading floor the thought process was more in the "so
what" category. Everybody has been buying the rally for several
months in anticipation of exactly what Intel failed to say.
They did not want to hear a few computers were going to be
doing school work. After 2-4 weeks that boom will be history.
They wanted to hear that companies were dumping in mass their
Y2K dinosaurs and stepping into the Star Wars generation. They
wanted to hear that budgets were being raised +15-25% to add
infrastructure in the form of servers and routers. The markets
did not get what they wanted. They did not get what they thought
they paid for over the last three months. Instead of confirming
the recovery Intel went out of their way, twice, to say there
was no real improvement in IT spending. There is some evidence
that small businesses are starting to crack their checkbooks
but they have yet to brush away the cobwebs.

The market flamed out on Friday like a rocket that had run out
of fuel before reaching orbit. It was spectacular but far from
the beginning of a new bear market. Even with the drop the
Nasdaq still finished +63 for the week. While the Dow at +27
was less exciting it still finished the week positive. Both
indexes are still at the upper end of their trading ranges and
even with the -150 drop off the Dow's intraday highs it still
closed right on support that has been resistance for three
months. This is not an ugly picture. The uptrend support is
still intact.

Dow Chart

The Nasdaq closed -46 points off its high, oh my! So what? The
Nasdaq had jumped +172 points since the 1640 low on August-8th.
In only 10 trading days it had climbed +10.5%. Read my print,
profit taking was due. Still it only fell back to just below
the uptrend resistance at 1767 from August-2002. Not a shabby
performance and a perfectly logical place to stop.

Nasdaq Chart

The most disturbing chart for the bulls is the S&P-500. The
S&P has failed to confirm the Dow or Nasdaq and failed to break
or even hit the two prior highs at 1015 from June and July.
This is very troubling for the bulls but for traders it has
been very profitable. The "buy 960,short 1000" trading plan has
been working so well that traders hate to part with it. The
constant range bound market is still in place on the S&P. The
failure to break to a new high formed a triple top on the S&P
and the normal pattern would be for the next test of 960 to
fail. I doubt it will do that next week with the bullish
undertones to the market.

S&P Chart

The problem is not next week but next week could be a problem.
Confused. Typically the week before Labor Day is worthless.
The volume is so low you can go to lunch and not miss a candle.
Many traders take off the week before Labor Day. Considering
we are entering the holiday week on a down note it could set
the tone and with low volume drift lower. Volume is a tool
of the bulls and markets do not hold major up moves without
it. We have had very low volume this week and you see where we
ended. We had lots of volatility and lots of movement but no
conviction. It was all knee jerk reactions to news events.
Nobody has yet to explain to me why Chemical Ali was bad for
the market and why his capture was bullish.

The problem is actually the next week. When traders come back
from the Labor Day holiday they typically are ready for a
change. The institutions begin thinking about taking profits
before the October dip and their year ends. They will lighten
in September and buy the dip in October. In 1929 the market
top came on the day after Labor Day. In the last 75 Septembers
only 30 have finished with a gain. Portfolio managers come
back from the Hamptons with a broom in one hand and a financial
statement in the other. Dump the losers and take profits on the
winners. The day after Labor Day is normally bullish, up 7 of
the last 8 years, but the excitement ends there. The September
end of quarter portfolio restructuring is the worst quarter of
the year. Will that happen this year? Nobody knows but with
huge gains after a three years of losses it is a sure bet the
funds will want to capture some of them before they get away.

A tidbit I picked up on Friday may give us a clue. Insider
selling is typically a leading indicator of market health. If
they are buying then the outlook for their company is strong.
If they are selling the outlook is weak. According to trackers
when the insider selling reaches 20:1 over buying it is bearish.
Currently sellers are running 35:1 over buyers. It has been
over 20:1 for four months. What do Gates and Dell call it?
Diversification. Michael Dell's wife diversified by selling
one million shares last week. $32 million in back to school
money for the kids. Michael sold 10 million last week. $320
million will buy some real toys. With 268 million shares left
they are going to need a lot of diversification. Michael if
you are reading this I am available for adoption.

The economic calendar begins with Existing Home sales on Monday,
and Durable Goods, New Home Sales and Consumer Confidence on
Tuesday. Skip Wednesday and pickup GDP, Chicago NAPM, Help
Wanted and Monthly Mass Layoffs on Thursday. Friday has Personal
Income, NY-NAPM, PMI and Michigan Sentiment again. The confidence
and sentiment numbers should be critical as well as the Chicago
and NY NAPM reports. As long as there is no critical damage in
these then the rally should continue with time outs for profit
taking. If anything the sell off on Friday took the pressure
off the shorts. They are no longer looking for high windows and
will be breathing easier over the weekend. Bulls are already
deciding where they can pick up some more bargains. Which side
you are on depends on whether you see the glass half full or
half empty. Personally I think the irrational exuberance from
last week filled it to overflowing and we need to pour a little
out before we can continue the process. There is no clear
answer but as long as the earnings and economic news continues
to improve the profit taking may be brief.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Doji Day
Jonathan Levinson

INTC managed to move the world with positive guidance Friday
morning.  A vertical launch on low volume in the pre-cash futures
markets brought the YM and NQ futures to new rally highs, while
the ES lagged again.  At the cash open, another pop brought
equities further but it failed to hold, kicking off a sometimes
sharp but otherwise orderly decline.  The equity futures closed
at their lows of the day.  Here's how it looked on the S&P

2 day 150-tick chart of the ES

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

10 minute chart of the US Dollar Index

At the same time that equities were peaking, the US Dollar Index
printed a session high above 99.20 before commencing a decline
for the remainder of the day.  The CRB Index added to its gains,
up .71 to 241.11, led by strength in corn, soybeans, cocoa, live
cattle and silver futures.  For the week, the US Dollar Index
added large gains to the previous week's dragonfly doji, gapping
above it.  This is a bullish morning star, and portends higher
prices for the US Dollar Index.

Daily chart of December gold

While INTC, equities and the dollar were ramping, December gold
was getting clocked, printing an intraday low of 359.40.  It
rebounded as the INTC Bounce ended, adding to its gains
quickly and holding them for the remainder of the session.
December gold printed an intraday high of 365.50 and closed at
364.50. The previous metals indices traded lower, the HUI
dropping 3.10 to close at 180.86, the XAU –1.24 to close at
86.79. For the week, the December gold contract traded in a wider
range than the previous week, finishing higher but near the
middle of its range.  This appears to be a bullish harami cross,
but it's imperfect and could also be construed bearishly.  This
ambivalence fits well within the context of its multi-month
neutral pennant on the daily chart.  I'm bullish on gold and on
commodities in general, but it could go either way from here
on a technical basis.

Daily chart of the ten year note yield

Amidst negative news from FRE, treasuries recovered to finish the
day positive, with the five year note yield dropping 5.3 basis
points, the ten year yield (TNX) –4.8 bps to close at 4.459%, and
the thirty –6.6 bps to close at 5.242%.  On the daily chart, the
TNX has a secondary ascending trendline with which to contend,
and I've highlighted the higher low on the 10 day stochastic.
While the Macd is in a clear downphase, the more sensitive
stochastic is ambivalent.  Overall, it remains a confusing market
at current levels, with the price below its steep daily uptrend
but respecting a weaker secondary one.

For the week, the  TNX closed lower, but near the top of its 5
day range.  The range was narrower than that of the previous
week, which amounts to a bearish harami on the weekly candle
chart.  This is bearish for the ten year yield, bullish for ten
year treasury bonds.

Daily NQ candles

The NQ spiked to a new high for the year at the open at 1343, and
closed at its low of the day, actually dipping slightly below
the ascending daily trendline.  On this timeframe, no other
technical damage was done, with the oscillators not even pausing
along their strong upphases.  It's worth remembering that the NQ
only dropped 8 points on the day, but the almost 40-point range
is where the action was, as we'll see in the 30 minute chart
below. For the week, the NQ closed in negative territory below a
big spike high, which could be a blowoff top.  The weekly
candlestick formation is a gravestone doji, which leaves us with
a bearish outlook for next week.

30 minute 20 day chart of the NQ

The opening blast took the NQ right to the top of its bear flag,
and the selloff broke the lower support line on a closing basis.
The oscillators, printing a non-confirmation of lower highs for
the past week, completely collapsed on steep sell signals. This
bearish-engulfing move projects further downside to come, but
corrective bounces within this trend can be expected,
particularly with the daily oscillators still within an upphase.

Daily ES candles

The ES gave us a bearish engulfing daily candle, and the day's
9.50 point decline was sufficient to impact the oscillators,
which did not flash sell signals but appear close.  The broken
bull flag trendline at 982 should provide support on this move,
if the oversold shorter cycles don't provide a bounce sooner.  On
the weekly candles (not shown), the ES finished in the red and
at the bottom of its range, also showing up what appears likely
to have been a blowoff top printed Friday morning.  This bearish
shooting star doji displays a complete hundred-and-eighty-degree
reversal at the top, and bodes ill for bulls next week.

20 day 30 minute chart of the ES

The weakening uptrend on the oscillators also availed itself of a
weakening secondary channel highlighted on the price candles,
both of which got broken today.  As well, horizontal support at
993 failed, with Fibonacci support at 992 stopping the plunge.
It was either fib support or the closing bell, as the ES closed
75 off its intraday low.  The stochastic is oversold, and many,
myself included, were expecting a bounce at the end of the
session.  With the short cycle oscillators (first chart at the
top of the page) trending in oversold and the 300 minute
stochastic at a multiweek low level, the ES is either set up for
bounce on Monday, or the beginning of a more significant
downtrending move.  In light of the weekly candlestick shooting
star doji, I'd give either scenario equal odds, but as of
Friday's close, that bounce looks like an excellent shorting
opportunity from here.

Daily YM candles

There's nothing to add on the Dow futures, as it finished midway
between the correction on the NQ and the destruction on the ES.
Like the ES, the YM finished the week at the bottom of its range
It failed at its high for the year on a spike move, closing near
the low.  This is a bearish shooting star formation on the weekly
candle chart.

20 day 30 minute chart of the YM

For the week just ended, we had a bullish finish on the US Dollar
Index, an ambiguous finish for gold, a bearish finish for
equities, and a bullish but uncertain finish for treasuries.  I
believe the picture was muddied this week as the result of the
Fed's large repo added last Friday as a prophylactic measure
following the power outages.  This large addition of liquidity
had to be withdrawn without overly disturbing the markets, which
appears to have been accomplished.

Most notable in my view is the possible disconnect between
treasuries and equities, which was seen on Friday when bonds only
began to advance once equities began to fall.  Again, the chart
of the ten year yield doesn't look clear to me because of the
secondary support still in place.  Meanwhile, a higher dollar
translated into lower equity prices, the same trend as we saw
through the spring rally, when lower dollars equaled higher
equities.  This tells me that the strength in the US Dollar Index
is not the result of foreign investors itching to buy US stocks.
If anything, that money is going or beginning to go into bonds.

For next week, caution will continue to be the rule.  I'll be
hoping for more days like today with nice, extended moves that go
beyond the stop-running chop we had for most of the week.  See
you there!


By Leigh Stevens

Stocks dropped Friday, with the Dow falling back under some
technical support, after starting the day on a high note after
Intel's (INTC) mid-quarter update earlier had sharply boosted
this key component to the tech heavy Nasdaq (as well as part of
the Dow average).

The Dow Industrials, which had led the market rally coming into
the week, closed off 74.8 points - at 9348.8 - on Friday, while
the Nasdaq Composite, fueled by the Semiconductor sector (SOX),
resumed as market leader but did give back 12 points on Friday
profit taking to finish at 1765.3; this after being up as much as
35 points during the session on the back of the Intel news.

The S&P 500 500 (SPX) fell also, by 10.2 points to 993.  However,
for the week, all indices rose to new yearly highs with the
exception of SPX.

Intel closed up nearly 4% to $27.39 after the world's biggest
microchip maker announced that its target for Q3 revenue was
being put up substantially (to $7.3 to $7.8 billion from its
prior forecast at $6.9-7.5 billion). The company credited its PC
business for the boost. However, the stock was also off
substantially from its early peak just over 29 bucks.

INTC's announcement caught traders by surprise and those with
short positions in the stock bailed by buying back shares. This
short-covering prompted the market's initial sharp rally until
some started thinking about the company's hefty valuation/PE
ratio based on current projected earnings, which brought in
substantial profit taking by those long the stock. No doubt those
who exited on the rally wish they had waited until the close!


While the economic recovery is not yet robust, market
participants have got the bullish bit in their teeth for those
tech darlings, particularly the smaller cap stocks. The tech-
heavy Nasdaq is again leading the rally, after the Dow led the
breakout of the Indices' consolidation of recent weeks.

I would be paying more attention these days to the smaller cap
Russell 2000 Index (RUT), which was an early breakout leader,
watching the extent of any RUT pullback ahead. And the market is
trading more "technically", as in technical analysis, not as in
technology shares - although both are in the forefront here.

Bottom line, the tech sector seems to be entering its next up leg
but the NYSE related Indices look like they are going to continue
to consolidate a while longer. Tech can go up on a wing and a
prayer, investors have to see the "whites of their eyes"
(earnings) for other sectors.

Sideways consolidations, after an initial strong run up, most
often tend to take the "form" of a rectangular or triangular
pattern as you'll see on some of the charts I've marked up. Why
does it matter to label a pattern as a consolidation - the short
answer is that it tells you (usually) that the next big move
should be in the direction of the prior TREND. If you hunger for
more on this subject, go to my prior Trader's Corner article at -

The key to seeing that the rally was coming happened to come from
the Dow industrials.  Just as there is rotation among stock
groups, while some go ahead, then others leapfrog them, there is
rotation among the indexes.

The Dow, in what often used to sometimes be called a "solitary
walk of the Dow", was the tip off to the rally that was coming.
I didn't quite believe that there was going to be so much upside
follow through in the (typical) August doldrums, but I tend to
follow "breakout" moves at least for a trade, assuming that the
market knows more than me.  And, I trust the charts - until
proven otherwise!


The 4-week moving average for jobless claims, which helps
smooth out weekly fluctuations, showed an improvement (as
announced Thursday), dipping to 394,250, down from 395,500 the
previous week - this was the lowest point for the four-week
moving average since Feb. 15.  It is considered to be important
when the 4-week average is staying below, and declining from, the
400,000 level.

So the question become whether those improvements will be
reflected in a corresponding growth in the all-important monthly
payrolls figures. As a "lagging" indicator, I don't look for
improvement in the payrolls for another 1-2 months.

The market has also shifted its focus from questioning whether
the U.S. economy will experience a "double-dip" recession to how
fast the economy can grow and how long before the Fed will need
to begin raising rates.  Good point.

Higher interest rates have cooled the rate of mortgage
refinancing and the same long rate rise should cool housing
activity by year's end.  So, something else has got to pick up
the slack - so the thinking was in the Street of Dreams last
week.  Mostly, now, the market is dreaming that something will.
A good dream, so I hope it happens.

One item that got attention in Intel's revenue forecast increase
was that the company said it had revised its gross margins for
the current quarter upward to 54% from 50.9%. As OIN's Jeff
Bailey noted on Friday, this upward revision indicated that the
company's newest products were being well received by their
marketplace. And, with the increase in margins more of a revenue
increase comes to the company's bottom line - more profit is
music to the ears of investors.

Some other stocks in the news -

Schering-Plough, which late Thursday announced a major dividend
cut (nearly 70%) dropped slightly over 9% or 1.52, to close at
14.96 on the NYSE, dragging down the drug sector.

The stock of Gap stores fell 43 cents to 19.22 on the Big Board,
even though the apparel retailer's second-quarter earnings more
than tripled. Classic buy the expectations, sell the "fact" as
the retailing sector has been in an uptrend for some time.

Boeing said it plans to lay off another 1,440 employees as part
of continuing job reductions at the company. Boeing's stock
rallied 70 cents, to 35.68. Most of the announced cuts will take
place in the Seattle area, where the company makes nearly all of
its commercial jets. Hey, owning a house in that neck of the
woods is far worst than the rest of the West Coast, especially
California, when you want to pack up for greener pastures.

Shares of computer anti-virus software-maker Symantec, which is
taking more and more of this important market, (symbol: SYMC),
traded to a new all-time high at $54.59 (+2.5%)in the session and
held most of those gains. SYMC has its hooks in me, as I ante up
annual fees for anti-virus for both my laptop and PC - who is
going to go without virus (and those worms!) ongoing protection
in this day of cyber-terrorists!


The 10-year Treasury note rose 1/4, or $1.25 for each $1,000
invested, to yield 4.455%. The 10-year benchmark Treasury note
rose for just the 3rd time in the past 10 weeks, gaining 17/32 on
the week with its yield falling back to 4.465%. Bond prices up
means yields were down - or, the bond interest rate if bought at
that price.

Friday in New York, the dollar bought 117.57 yen, down from
118.15. The euro fell against the dollar, trading at $1.0890,
down from $1.0921.  With recession now tolling in France and
joining Italy and Germany, with a 2nd consecutive quarter of
lower GDP, the dollar has been in a recovery rally against
Euroland recently as it trades down from the 1.12-1.13 area.


My mother used to hate it when her supermarket changed the aisle
merchandise around and she had to slow down her rush through to
find stuff. What does this have to do with my Index outlook? -
nothing and everything, as I go in order of interest through the
Index charts this week.


Nasdaq Composite (COMPX) – Hourly chart:
Sometimes ya see a pattern developing beforehand, sometimes not.
I didn't have this key upper trendline drawn here on Comp chart,
but it sure is telling me a bunch with this chart breakout.

ONE - The main correction is probably over in the Nasdaq indices
given the completion of the down-up-down common correction
pattern - this pattern relates to the way the markets work and
"wave" concepts in particular.

TWO - An important thing about the breakout of a triangle pattern
is a minimum upside objective can be projected - this is as I say
a "minimum" possible upside objective and not to be taken as a
final objective for an advance like this and does not measure a
time frame in which it "has" to occur, although that is usually
within a month - weeks not months anyway.  The upside objective
implied for the Composite becomes to around 1880-1890 - just shy
of 1900 as noted on the chart below -

Another point, as with any trendline, corrections can tend to
come back as far as the trendline - to around 1720 right now -
but shouldn't close under it, especially on a daily closing
basis.  Since the trendline slopes down over the coming week,
lets call it 1700 - a close under 1700 is suggesting that what we
saw last week was a "false" breakout or the pattern didn't have
its predictive ability it often or usually has.

Any of you not having a sunny afternoon calling you outside like
here, could peruse Trader's Corner articles I wrote on the
subject I'll put these references at the bottom, so as to not
agitate dear readers who want to move on NOW - spoken like a true

As far as looking to where being long options is favorable,
unlike maybe the futures, buying calls or puts in the middle of a
relatively narrow expected range doesn't offer the needed
potential for a sizable move - unless there is breakout to
resolve the trend, but this doesn't seem likely anytime soon.

If you want to know why the Nasdaq, Nas 100 and QQQ rebounded, I
see it as the influence of the chip stocks. To revisit the
Semiconductor stock index (SOX) chart, see the chart below -

The SOX is looking quite strong and is exerting influence on tech
stocks in general as it is prone to do.  A close back under its
trendline - call it 360 to cover all of next week - would be a
bearish technical development.  Otherwise, look for SOX to climb
higher, maybe after one more dip to the 400 area.

Reinforcing the idea that the Chip index is due for a pullback is
the oversold level reached on the 14-day RSI as seen above.


Within Nasdaq, the smaller cap tech stocks are getting played in
a significant way.  Because of this, I suggest paying greater
attention to how the Russell 2000 (RUT) acts in the coming weeks.
I would anticipate, if the RUT is on a bullish track here, for
any corrections to hold at and not close below the prior peak -
(prior resistance, once pierced, "becomes" future support).

S&P 100 Index (OEX) – Daily chart:
My principal sentiment indicator, that of the daily volume ratio
of the equities calls to puts, had one spike into "overbought"
territory as noted below; i.e., a reading above the red line.  As
typical of this indicator, a correction followed.

No triangle breakout similar to the Nasdaq was seen and the OEX
reversed in the area of its resistance trendline.  In August it
takes substantial institutional buying to create upside follow
through above resistance areas and these folks are not likely yet
convinced that its time to throw more money at stocks without
further evidence of a stronger economy and a solid upward trend
in earnings.

As before, would treat this Index as a trading range affair still
and buy down neat 489-490.  If former resistance at 500 becomes
new support, then the lower level of the trading range has
ratcheted up some to 500 - 510 for the time being.

I suggest buying calls at the low end of whichever range,
epecially if the RSI gets back to a more fully oversold reading
again, such as to around 35.  A sideways trend will tend to keep
the oscillator type indicators into at least neutral or midrange
readings.  I like to go into a more substantial position when the
price is right (at the low or high end of a range) and when the
RSI is at an extreme.  That's the ideal - not always realized,
but when it is, its worth waiting for.

Dow Industrials Index (DJX.X)- Hourly chart:
The Dow has failed or reversed its rally after getting up the
9500 area.  The true and best tip off for a reversal was when the
hourly DJX RSI (21 Length setting) was heading lower as the Index
was heading to a new high.  Buy puts into those kind of rallies,
even if there was a breakout.  False breakouts happen often
enough to trade against them.  But, price/RSI divergences tend to
have an even higher degree of trade reliability as a reversal
type "signal".

93 is must hold technical support now in my estimation.  The new
range may be for a while, at 93 - 95 and I am trading

Nasdaq 100 Tracking Stock (QQQ) - Daily and Hourly charts:

Basis the daily chart, the Q's got back into what was their
broader uptrend channel - the question is whether they can hold
into that channel now and start a renewed advance.  Time to go to
the hourly charts -

I would note on the daily chart above, that the stock is into
overbought stochastic readings and the daily trading volume has
not picked up as much as I would expect if this rally was going
to really take off just yet.  Time for more backing and filling
probably - stay tuned!

I expect a drift lower unless the Q's immediately pop back above
the prior high at the red dashed line.  If 31.5-31.7 holds as
support, then I suggest buying the stock again for a pop,
especially if the stochastic is down to the bottom again.

The stock could come back to the 30 area again and not change the
overall bullish chart. I am thinking that a 31 to 34 range is
shaping up for the coming 2-week period.  I will feel more
confident buying the stock for other than on a quite short-term
basis (e.g. 1-2 day periods) when we get into September, where
there is propensity to rally on a seasonal basis.

Of course, we got to get past Sept. to get Q3 earnings, but a
strong rally could develop on the expectation of better earnings
if the economic reports continue to show a pick up in the

Good Trading Success!


Wave analysis in price trends; part 1

Wave analysis in price trends; part 2

Wave analysis in price trends; part 3

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Editor's Plays

Will History Repeat?

For more quarters than I care to show the pattern has been
the same. Stocks, primarily chip stocks run up into the Intel
guidance announcement and then tank. It does not seem to make
any difference if the guidance is good or bad as the smart
money always buys the rumor and sells the fact. Essentially
they are always expecting that blowout news to signal the
recovery in progress but are always disappointed by the
update given.

It is particularly ugly if you look at the last August bounce.
The market was declining but we still got the ramp into the
guidance with traders still hoping for a second half recovery.
The news was not good and the sell off was steep.

Fast forward to June of this year. The guidance was decent
with a slight improvement. The actual wording of the release
was almost exactly the same.

"The company's Intel Architecture business is trending to
the high end of the normal seasonal pattern while demand for
communications products remains soft. All other expectations
are unchanged".

We got a big gap up and the SMH sold off for the next three
weeks. They always want more than they get and they are
always disappointed.

The play for today is an October $35 Put on the SMH. It
closed on Friday at $1.45x$1.55 and has an open interest
of 11,000. Obviously there are some other like minded
investors playing the same bounce.

The stop loss is going to be $38 and the profit target is
$33. The symbol is SMH-VG.

SOX Chart

SMH Chart

SMH Chart - Aug-2002


Play updates:

QQQ Puts - August 17th.

It was almost painless. The explosion out of the gate on
Monday knocked the Sept-$30 puts down to 45 cents if anybody
was brave enough to buy them in a rapidly rising market.
The $32 stop loss was hit late Monday afternoon and they
closed at 30 cents. It was a quick play and a merciful
exit considering the remainder of the week.


EMC and CMVT are soaring out into the lead. Even the laggards
TLAB and RFMD are slowly ticking up. Bad news from ADCT this
week sent them to zero but still five months to go.

It would have taken $1,255 to buy one contract of each on
January-2nd. Any bets on what this will be worth on 12/31/03

Powerball Chart


Remember, these are high risk plays and should only be made
with risk capital.

Good Luck

Jim Brown


-Jonathan Levinson

After week of immersion in the daily and intraday charts, we can
look to the big picture and see how the story has unfolded on the
weekly candlestick charts.

Stocks had a negative week, with the S&P leading to the downside,
followed by the Dow, with the Nasdaq finishing as the strongest
of the three.  The SPX closed at its weekly low, traversing a
wide range to the upside but failing to hold any of it.  This is
known in candlestick charting terms as a shooting star doji, and
projects further weakness on this timeframe.  The same formation
was printed by Dow.  The Nasdaq closed lower as well, but did not
"blow off" as much of its gains.  The resulting gravestone doji
candle is also bearish, but not as much as those of the SPX and

The VIX printed a a bullish doji star on the weekly candle chart,
while the QQV and VXN gave us bullish doji hammers.  The term
"doji" is coming up a lot, and this smacks of reversal, with
topping / reversal candles on stocks coinciding with bottoming
/reversal candles on the volatility indices.

These signals on the weekly charts are indicative of the broader
trend, and do not rule out bounces or even rallies from here.
But, on this longer timeframe, this was a week of reversals, and
next week will be crucial in confirming whether the market is
entering the next bearish wave.


Market Averages


52-week High:  9499
52-week Low :  7197
Current     :  9348

Moving Averages:

 10-dma: 9344
 50-dma: 9185
200-dma: 8592

S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     :  993

Moving Averages:

 10-dma:  991
 50-dma:  990
200-dma:  917

Nasdaq-100 ($NDX)

52-week High: 1342
52-week Low :  795
Current     : 1304

Moving Averages:

 10-dma: 1271
 50-dma: 1252
200-dma: 1108


The VIX just finished two days under the 20 level and Friday's market
weakness was enough to pop it back above this pivotal area.  The VXN
has rebounded from all time lows near 26.00 and is about to break above
the 30 mark.  By all indications we could be witnessing the market top
that these volatility indices have been forecasting for months now.  It
just took an extreme reading to signal the turning point.

CBOE Market Volatility Index (VIX) = 20.27 +0.56
Nasdaq Volatility Index (VXN)      = 29.47 +1.83


          Put/Call Ratio  Call Volume   Put Volume

Total          0.91        511,038       463,251
Equity Only    0.72        439,724       315,751
OEX            1.27         18,281        23,138
QQQ            0.75         29,991        22,467


Bullish Percent Data

           Current   Change   Status
NYSE          70.0    + 0     Bull Confirmed
NASDAQ-100    75.0    + 3     Bear Correction
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       77.4    + 1     Bull Correction
S&P 100       84.0    + 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  0.97
10-Day Arms Index  0.92
21-Day Arms Index  0.99
55-Day Arms Index  1.09

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers     838      1022
Decliners    1996      2061

New Highs      76       115
New Lows       10         4

Up Volume    396M      673M
Down Vol.   1161M     1002M

Total Vol.  1566M     1685M
M = millions


Commitments Of Traders Report: 08/19/03

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

There is nothing eye opening to report in the large S&P futures
contracts today.  Commercials remain slight more short than long
and small traders are significantly long the market.

Commercials   Long      Short      Net     % Of OI
07/29/03      405,429   445,114   (39,685)   (4.7%)
08/05/03      395,633   450,988   (55,353)   (6.5%)
08/12/03      399,414   456,767   (57,353)   (6.7%)
08/19/03      404,665   455,381   (50,716)   (5.9%)

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
07/29/03      155,216    73,030    82,186    36.0%
08/05/03      159,971    72,951    87,020    37.4%
08/12/03      158,821    71,040    87,781    38.2%
08/19/03      162,034    87,064    74,970    30.1%

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

Meanwhile for the e-mini contracts commercial traders are
still net long.  Small traders are still net short but we
saw a big increase in long positions.

Commercials   Long      Short      Net     % Of OI
07/29/03      272,659   216,166     56,493    11.6%
08/05/03      310,662   249,004     61,658    11.0%
08/12/03      306,014   217,233     88,781    17.0%
08/19/03      296,971   235,779     61,192    11.5%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:   88,781   - 08/12/03

Small Traders Long      Short      Net     % of OI
07/29/03       44,437    93,144   (48,707)  (35.4%)
08/05/03       56,663    95,919   (39,256)  (25.7%)
08/12/03       62,534   106,403   (43,869)  (26.0%)
08/19/03       90,428   125,980   (35,552)  (16.4%)

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


Hmm... interesting development here.  Commercial traders
are still net short the NDX so that's not a surprise but
the extreme just brushed a new "high" so to speak.  Retail
traders are still net long but there was a big bump in
short positions.

Commercials   Long      Short      Net     % of OI
07/29/03       31,456     50,294   (18,838) (23.0%)
08/05/03       32,813     52,383   (19,570) (23.0%)
08/12/03       34,374     53,015   (18,641) (21.3%)
08/19/03       32,107     53,665   (21,558) (25.1%)

Most bearish reading of the year: (21,558)  - 08/19/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
07/29/03       25,691     7,810    17,881    53.4%
08/05/03       22,188     7,783    14,405    48.1%
08/12/03       23,957     7,871    16,086    50.5%
08/19/03       25,607    10,134    15,473    43.3%

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


Wow!  We see a big change in sentiment by the commercial
traders in the DJ futures.  Short positions doubled indicating
a growing expectation that the market could rollover.
Right on cue the retail trader is picking the wrong direction
and more than doubled their long positions while slashing
their shorts.  This sort of extreme flip-flop would indicate
a market reversal in the making.

Commercials   Long      Short      Net     % of OI
07/29/03       23,696     9,572   14,124      42.5%
08/05/03       23,981     9,264   14,717      44.3%
08/12/03       24,942     9,878   15,064      43.3%
08/19/03       21,088    18,984    2,104       5.3%

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
07/29/03        5,744    11,601   (5,857)   (33.8%)
08/05/03        5,716    10,422   (4,706)   (29.2%)
08/12/03        6,933    13,248   (6,315)   (31.3%)
08/19/03       15,717     9,143    6,574     26.4%

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   6,574  -  8/19/03


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Mortgage rates, refinancing and Treasury yields

Hi, I was recently offered a position as a loan officer for a
reputable home finance company.  However, I have no education in
the industry.  In fact, I have no knowledge about the stock
market, refinancing, interest rates, or anything related to real
estate.  One thing I am trying to understand, and maybe you can
give me some direction or a good online beginners manual website
to go to, is the relationship between the stock market and
interest rates, and how bond markets and the 10 year note relate
to interest rates.  Any information you can give me would be

First of all, congratulations for being offered a position of
employment in today's tough job market!  It would be my initial
observation that your interviewing skills were strong and you are
probably viewed by those around you as a fast learner that is
highly motivated and not afraid to ask a few question.

Now, some investors may think... this is such an easy question to
answer, but I'm going to give it a twist.  The twist is going to
be my, Jeff Bailey's, perception of real estate as actually being
an illiquid investment, which can not only be thought of as an
asset, but also a liability!  And it may be this very discussion,
which may give some insight as to what may actually be in play
not only in the stock market, but one part of the U.S. economy.

I don't know of any good beginners manual or website that you can
go to in order to get a quick explanation to help build an
initial background for your new career, but I've been in this
subscriber's shoes when I first went to work for Mobil Oil years
ago.  At the time (mid-1980's) I was probably considered highly
computer literate, but knew very little about the exploration and
production of oil and natural gas.  But that didn't stop me from
applying my computer skills and spending 7, rather enjoyable
years with the company.  That's where I also began learning about
investing, and where I learned a lot about what it is to be a
homeowner when a real estate bubble burst here in Denver,
Colorado when most of the major oil companies pulled out of the
Rocky Mountain region!

The basics I think any investor or trader of any asset needs to
understand is the simple concept that PRICE is determines by
supply and demand.

An example might be, if you live in a small town like Liberal,
Kansas, say 25,000 people and there are 10 nearly identical
houses for sale, and Mobil Oil announces it is going to be
transferring 75 employees to Liberal, Kansas from its Denver and
Oklahoma City, Oklahoma offices, what do you think the value of
those houses might do?  Rise 20% overnight?  That's about right.

Guess what happens about a month later?  New listings (supply)
increase by about 10% as the neighbor or close friend of one of
the owners finds out that his or her buddy is about to strike it
rich.  Once all the Mobil Employees have done their house hunting
and have paid top dollar, the demand declines and housing prices
in the town settle back to where they were 6-months prior.

As it relates to Treasuries and stocks, the MARKET (you and I)
also plays a role in determining price.

The basics of a Treasury bond is really rather simple.  Just
think of a teeter totter.  On one end, place PRICE and on the
other end place YIELD.  Should price rise (more buyers than
sellers) then YIELD will fall.  Should price decline, then YIELD
will rise.

It should also be understood that the MARKET (you and I)
establish what a Treasury bond like the 10-year Treasury will be
worth.  As such, the MARKET will also establish a YIELD for that
bond, which can change rather dramatically.

While the price of any security is established by the MARKET,
there are various market forces that will influence supply and
demand.  Two of the GREATEST forces are GREED and FEAR!

As a soon to become mortgage lender and perhaps investor/trader
of securities, REMEMBER the emotions, GREED and FEAR, as these
two emotions are most likely THE MOST IMPORTANT TOOL that you
will use, along with the education of your client (that you're
going to provide), to have your prospect doing business with YOU,
and not the mortgage lender next door!

Don't get me wrong!  I'm not saying mortgage lenders are
"ambulance chasers," or higher pressure sales people.  You will
be tactful in how you explain to your potential customer why they
need to do business with you.

It is my view that a single family home should be considered an
illiquid asset.  Yes, there are or have been housing markets
where the listing time as been as short as two weeks, but there
are times when a new listing sits on the market for several
months as there simply aren't any buyers.

Is a house an asset or liability?  This depends on current market
conditions and supply/demand for housing at that time.

If we incorporate RISK MANAGEMENT into our thinking of a home, I
consider a home or piece of property, which is rather illiquid
compared to other securities an individual could buy, as being a

Some investors in real estate may disagree with me on this point,
but if I buy a house for $250,000.00 and have at $200,000.00
mortgage liability, I consider this example as being a rather
illiquid liability.  If I were employed at the time I bought the
house, say two years ago, but lost my job last year, I would
then, to a greater degree, consider my home an illiquid

Furthermore, if I have a $200,000.00 mortgage that I'm paying
monthly payments to the bank on, who actually owns this piece of
property?  THE BANK!  I don't own a home until the mortgage is
paid off.  If I miss a couple of monthly mortgage payments, I'm
rather certain the bank is going to come looking to get THEIR
property.  If need be, they'll foreclose on me, and even though
the house next door has a "For Sale" sign in front of it with an
asking price of $250,000.00, the bank doesn't care, all they want
is their $200,000.00.  They don't necessarily care if I recovery
my $250,000.00 of original purchase.

Sales technique:  When talking with a potential client about
refinancing his/her mortgage, suggest to them that when they
refinance their mortgage, to think of it as shifting RISK of an
illiquid asset/liability to the bank.  It's smart of them, while
they are currently employed, to think about diversifying their
wealth, especially if they are younger and bulk of their net
worth is concentrated in their home.  Should your potential
customer lose his/her job, it would most likely be difficult to
secure any financing without a source of income.  By refinancing
NOW, they're pulling liquidity from their illiquid home,
diversifying their asset base, and perhaps gathering further tax
deductibility from the mortgage interest payment.  Also explain
that while it is very difficult to predict future housing price
trends, real estate values will cycle.  Wouldn't it be terrible
to not only lose your job and source of income, but at the same
time see housing prices in your area decline?  By refinancing
your mortgage, not only are you diversifying your investments,
but your also shifting RISK onto the bank!

Individuals (you and I) should perhaps be listening and
understanding the concept of how our house (or the banks house)
fits into our asset allocation and RISK management.

Do you know anyone personally that is suffering from stress due
to the inability to make their monthly mortgage payment due to
loss of employment, yet sits on equity in the property, but is no
longer able to refinance the dwelling as they have income, which
the lender requires in order to have the bank assuming the RISK?

Buy low, sell high!  We've all heard this phrase.  What am I
doing when I refinance my house, which hopefully has appreciated
in value?  When I'm sucking some liquidity from the home, I'm
actually re-selling the house to the bank at a HIGHER price.  How
wonderful it would be if I did this when mortgage interest rates
were at 40-year lows!

One of the hardest decisions an investor has to make when
considering a new home purchase or refinancing an existing
dwelling is the direction of mortgage rates.

But this really shouldn't be a hard decision, if put in the
perspective of RISK management.  Do I, or should I really care
what the rate of interest is on the mortgage today?  If I'm a
willing buyer of a piece of property for $250,000.00, my
"interest rate RISK" is that the mortgage rate is going to RISE,
not fall.  However, it is GREED that will have a potential buyer
waiting to lock in a mortgage at a lower rate than current rate.
How silly is that?  Lock it in, and if rates fall, then refinance
it at the lower rate!

The main RISK to an investor in real estate is that the
price/value of the dwelling declines, and the bulk of your
financial net worth is held in that illiquid investment!

Now wait a minute!  What if the property I'm looking at, which is
listed at $250,000.00 is affordable for me when a 30-year fixed
rate mortgage is 5.00%, but suddenly rates rise to 5.23%, then
5.72% and now I can't qualify for that $250,000.00 mortgage loan?
What has to happen?  Either I have to wait for mortgage rates to
fall back where I can afford the $250,000.00 mortgage, or.... the
SELLER has to come DOWN in PRICE if he/she wants to sell it to
me.  It would have been so much simpler if I had just locked it
in when I had the chance.

And it this very rising in Treasury YIELDs in recent months,
which in turn has caused mortgage rates to rise, which in turn
has had mortgage applications and refinancing applications

In last weekend's Ask the Analyst column, "Betting on or against
Treasuries with options" I posted a spreadsheet that I'm trying
to populate with data gathered from the Mortgage Bankers

While I stay pretty busy during the week, I've updated for this
week's MBA report, which is released each Wednesday for the prior
week's data (Monday-Friday).

While I'm monitoring this data, and still trying to better
understand the impact that higher YIELDS have had on the mortgage
application and refinancing trends, which may give insight to
fundamental strength/weakness among the publicly traded
homebuilders that comprise the Dow Jones Home Construction Index
(DJUSHB) 441.97 -1.96%, I'm also aware that while the U.S.
economy continues to show improvement, the rate of improvement,
or growth, has been largely driven by the consumer.  Perhaps a
consumer that may have lost a job, but has been able to continue
spending after previously refinancing an existing mortgage.

While I haven't gotten a lot of work done on this data, I've
added a couple of new observations.  One set of data added is the
5-day average of the 10-year Treasury YIELD ($TNX.X), where I've
simply placed a 5-day simple moving average on the 10-year
Treasury YIELD's chart, and noted its reading each Friday of
recent weeks.  I added this data so that I wouldn't have to wait
until Wednesday of a following week to get a feel for what the
this week's average mortgage rate might be.

If I were in the business of trying to sell a mortgage to a
potential customer, one of my value added services would be to
try and help a customer understand mortgage rate trends.
Depending on the potential customers window where they were
looking to lock in a rate, I could explain to them the 5-day
average increase/decrease or even a 30-day average
increase/decrease if that was their window of opportunity.

A second set of data added, actually it is calculated, is the
rate of change, or % change in the weekly mortgage applications
data.  This is what I think investors may want to be following,
particularly those investors or traders in the homebuilders.  It
is a general assumption that if mortgage applications are falling
then demand is drying up.  If demand continues to dry up, at some
point a real estate developer, homebuilder, homeowner would
eventually expect prices to fall.  Sometimes it is easier, if not
important to observe the rate of change in an advance or decline
to truly sense what is taking place.

For further explanation of the following table, please read last
weekend's Ask the Analyst column.

Weekly Mortgage Bankers Association Survey Statistics

Again... the 5-day average 10-year column is simply taken from
the average YIELD for the 10-year Treasury Bond ($TNX.X).  This
week, the average YIELD was 4.45%, so I wouldn't expect this
Wednesday's average 30-year fixed rate mortgage to change all
that much.

The last two weeks have seen a 16% decline and 10% decline in the
Mortgage Application's Index.  While I have never seen an
economist weekly forecast for mortgage applications, and I'm not
an economists, I would forecast a slight decline if not
relatively unchanged reading for the Mortgage Applications Index.
An investor/trader may make a different forecast, which is a
great thing for investors/traders to do.  This can keep a
trader/investor honest, and if they are wrong on their forecast,
then some adjustments to the forecasting model may need to be
made.  By no means is the above table a forecasting model, but
hopefully we can see how various pieces of the puzzle, or data
and moving averages can be used.

On the far right of the spreadsheet, to feed my curiosity, I
wanted to calculate what the actual basis point spread has been
on a week-to-week observation between my 5-day average 10-year
YIELD and what the Mortgage Bankers Association was reporting as
the average weekly 30-year mortgage YIELD.  I averaged the April
23 to August 20 basis point spread and it is averaging about 173
basis points.

For the subscriber that asked this weekend's question, the term
basis point is bond yield terminology.  For instance, it is much
easier to say "Right now, there's about 174 basis points spread
between a 30-year fixed rate mortgage and the 10-year Treasury
YIELD," than it is to say "Right now, there's about zero-point-
zero-one-seven-four spread between the ......"

While there is no way I could ever attempt to write an Ask the
Analyst column on the basics of the mortgage loan business and
its ties to Treasury yields and further impact on the market, I
have covered many of these items in past Index Trader Wraps at
OptionInvestor.com, and various articles in the Bailey's Basics
and in these Ask the Analyst columns.

Right now, Treasury YIELDS are quite perplexing as it would
relate to their action and what impact the bond market's trade is
having on the stock market.

It is my view that the U.S. economic recovery is improving.  It
is encouraging, in my opinion, to see the MARKET finally willing
to sell Treasuries on a rather meaningful basis the past two
months.  Why?  Because the last two years, the MARKET has been
buying Treasuries due to their low RISK, when compared to stocks.

However, at this stage of an economic upturn, the recent SHARP
and RAPID rise in Treasury YIELDS (from selling in the bond)
could threaten the home construction sector, which has been one
part of the economy that has been able to keep its workers
employed on a more steady basis.

As we can see, the mortgage applications index has been falling
in recent weeks, about as quick as Treasury YIELDs have risen.

For an economy to be STRONG, does it need a STRONG housing
market?  The answer is no.

The United States has been VERY fortunate the past two years,
when the economy went into a recession, that the housing market
and prices of homes had risen during the stronger economic period
prior to the recession.  That strong housing market enabled many
Americans to refinance their mortgages, free up some capital from
their homes, and for some, may have allowed for a still
comfortable standard of living after they may have lost their

As the economy has shown signs of improvement, the last and final
ingredient to a more robust or stronger economy is new job
growth.  It has been noted over multiple up and down economy
cycles that job growth is usually the final economic indicator to
show improvement when an economy attempts to recover from the
weaker economic cycle.

One book I would strongly recommend the subscriber read is Point
and Figure Charting, by Thomas Dorsey.  I'm not necessarily
trying to push you toward point and figure charting, but I would
think many of Tom's words regarding supply and demand charting
will drive home how prices, in a free market economy, are

I'm not here to sell books, but browse through our bookstore
of investment-related books.  The first book I read on the
subject of investing was Stan Weinstein's "Secrets for Profiting
in Bull and Bear Markets."  I thought it was an easy read and
helped me understand some of the basics of investing and after
reading I understood that stocks go up and stocks go down.
Economies grow and economies contract.  Real estate values go up
and real estate values go down.  Job markets will be strong and
job markets will be weak.

Hey... who knows?  Maybe this weekend's subscriber e-mail, from a
newly employed mortgage loan officer is further sign the economy
is on the mend?

It has been said that a wealthy person's most important advisor
is his accountant, lawyer and investment broker.  There may be
some people out there that would add their mortgage broker to
that list.  I think any individual that has bought a home,
doesn't understand that they are not simply making monthly
payments for a roof over their head.  In a way, they are making
monthly payments on an illiquid liability, which can be an ASSET
with good sound guidance and advice from their mortgage broker.

If I can share one story with you on this subject.

During my career as an investment advisor, selling/buying stocks,
bonds, mutual funds and options for clients, one of my clients
called me and wanted to take $100,000.00 out of his account,
which was just sitting in cash as we waited for the bullish %
indicators, which were declining from overbought levels to
oversold levels.

I made it my business to find out why?  We had just made some
very good profits in recent months and I was really looking
forward to doing it again.

He had been to a party at his neighbor's house, and his neighbor
was boasting how at age 45, he had just paid his house off and
things couldn't be better.  My client, never one to be outdone by
the Jones', wanted to do the same.

What?  I asked.  Every time I advise you to take a profit on an
investment, all you do is complain about the capital gains taxes
and impact on you income tax return.  Please understand, this
client and I had become very good friends.

What it actually came down to, was that indeed he just wanted the
sense of security of paying off his house, without regard to risk
management or asset diversification.

I new how much his house's market value was and what he owed on
it.  I needed that information as his investment advisor.  What I
didn't know was that he had a 10% mortgage rate on roughly
$160,000 remaining balance.

Long story short, I told him that his house along with other real
estate holding represented a rather large amount of his wealth,
and if anything, his higher levels of earned income from his self
employed business could actually be somewhat relieved if he were
to actually mortgage his home "to the hilt" at a lower mortgage
rate of interest 7% at that time, then we would take some of that
cash from the refinancing and set up some tax-sheltered trusts
for his kids, but also take a portion of that capital, invest it
in a good double-tax free municipal bond fund and I'd send him a
tax-free check every month for his trouble.

He was shocked!  Called his accountant and three days later he
couldn't wait to refinance his mortgage and see various tax
benefits and diversification strategies put into play.

He's still doing very well in his business.  While I'm not as
intimate with his personal financial doings as I once was, I
would also feel comfortable in saying if something happened to
his business tomorrow, he'd be well positioned and have access to
more liquid assets to take care of his family for at least
several years, which may not necessarily have been the case if he
had simply paid off his house for no other reason than a sense of

Jeff Bailey


Earnings Calendar

Symbol  Company               Date           Comment      EPS Est

------------------------- MONDAY -------------------------------

ACF    AmeriCredit Corp.     Mon, Aug 25  After the Bell      0.16
MCDTA  McDATA Corporation    Mon, Aug 25  After the Bell      0.07

------------------------- TUESDAY ------------------------------

BMO    Bank Of Montreal      Tue, Aug 26  -----N/A-----        N/A
BNS    Bank of Nova Scotia   Tue, Aug 26  -----N/A-----        N/A
BNL    BUNZL PLC             Tue, Aug 26  Before the Bell      N/A
DLTR   Dollar Tree Stores    Tue, Aug 26  After the Bell      0.24
HRB    H&R Block, Inc.       Tue, Aug 26  After the Bell      0.01
HAR    Harman Intl Ind       Tue, Aug 26  -----N/A-----       1.02
MRX    Medicis               Tue, Aug 26  After the Bell      0.59
MBT    Mobile Telesystems    Tue, Aug 26  -----N/A-----        N/A
RGS    Regis Corporation     Tue, Aug 26  Before the Bell     0.50
RY     ROYAL BK CDA MONTREAL Tue, Aug 26  -----N/A-----        N/A
SMTC   Semtech               Tue, Aug 26  After the Bell      0.09
TKA    Telekom Austria AG    Tue, Aug 26  Before the Bell      N/A
TOL    Toll Brothers         Tue, Aug 26  Before the Bell     0.81
TTC    Toro                  Tue, Aug 26  Before the Bell     0.97

-----------------------  WEDNESDAY -----------------------------

BTH    Blyth Inc.            Wed, Aug 27  Before the Bell     0.22
BFb    Brown-Forman Corp     Wed, Aug 27  Before the Bell     0.66
CHS    Chico's FAS           Wed, Aug 27  After the Bell      0.26
COCO   Corinthian Colleges   Wed, Aug 27  Before the Bell     0.37
DCI    Donaldson             Wed, Aug 27  After the Bell      0.59
MIK    Michaels Stores       Wed, Aug 27  After the Bell      0.33
TECD   Tech Data Corporation Wed, Aug 27  -----N/A-----       0.36

------------------------- THURSDAY -----------------------------

ACDO   Accredo Health        Thu, Aug 28  -----N/A-----       0.32
APOL   Apollo Group          Thu, Aug 28  Before the Bell     0.34
BHP    BHP Billiton Ltd      Thu, Aug 28  Before the Bell     0.13
DG     Dollar General Corp.  Thu, Aug 28  Before the Bell     0.14
OTE    Hellenic Telecom      Thu, Aug 28  Before the Bell      N/A
AHO    Koninklijke Ahold NV  Thu, Aug 28  -----N/A-----        N/A
PETM   PetsMart              Thu, Aug 28  Before the Bell     0.17
REXMY  REXAM PLC             Thu, Aug 28  Before the Bell      N/A
TD     Toronto Dominion Bank Thu, Aug 28  -----N/A-----        N/A
VIP    Vimpel Communications Thu, Aug 28  -----N/A-----        N/A
ZLC    Zale Corporation      Thu, Aug 28  Before the Bell     0.20

------------------------- FRIDAY -------------------------------


Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

CECO    Career Education Corp     2:1      Aug  22nd   Aug  25th
FOBB    First Oak Brook Bancshares3:2      Aug  25th   Aug  26th
CELL    Brightpoint Inc           3:2      Aug  25th   Aug  26th
CBK     Christopher & Banks Corp  3:2      Aug  27th   Aug  28th
BER     W. R. Berkley Corp        3:2      Aug  27th   Aug  28th
EBAY    eBay                      2:1      Aug  28th   Aug  29th
JBHT    J.B. Hunt Transport Serv  2:1      Aug  29th   Sep   1st
RCII    Rent A Center             5:2      Aug  29th   Sep   1st
AFP     United Capital Corp       2:1      Aug  29th   Sep   1st
JCOM    J2 Global Communication   2:1      Aug  29th   Sep   1st
CHDX    Chindex International Inc 2:1      Sep   2nd   Sep   3rd
HOTT    Hot Topic Inc             3:2      Sep   2nd   Sep   3rd
PFB     PFF Bancorp Inc           7:5      Sep   5th   Sep   8th
RBKV    Resource Bankshares Corp  3:2      Sep   5th   Sep   8th
PSUN    Pacific Sunwear of CA Inc 3:2      Sep   5th   Sep   8th

Economic Reports This Week

Wall Street still has a few straggling earnings report but any
traders not on vacation will be watching a full week of economic
reports.  Home sales, consumer confidence, GDP, personal income
and spending, etc.


Monday, 08/25/03
Existing Home Sales(DM) Jul  Forecast:   5.90M  Previous:    5.83M

Tuesday, 08/26/03
Durable Orders (BB)     Jul  Forecast:    0.9%  Previous:     2.3%
Consumer Confidence(DM) Aug  Forecast:    79.7  Previous:     76.6
New Home Sales (DM)     Jul  Forecast:   1140K  Previous:    1160K

Wednesday, 08/27/03

Thursday, 08/28/03
Initial Claims (BB)   08/23  Forecast:    391K  Previous:     386K
GDP-Prel. (BB)           Q2  Forecast:    2.9%  Previous:     2.4%
Chain Deflator Prel.(BB) Q2  Forecast:    1.0%  Previous:     1.0%
Help Wanted Index (DM)  Jul  Forecast:      39  Previous:       38

Friday, 08/29/03
Personal Income (BB)    Jul  Forecast:    0.3%  Previous:     0.3%
Personal Spending (BB)  Jul  Forecast:    0.8%  Previous:     0.3%
Mich Sentiment-Rev.(DM) Aug  Forecast:    90.2  Previous:     90.2
Chicago PMI (DM)        Aug  Forecast:    55.8  Previous:     55.9

DM=  During the Market
BB=  Before the Bell
AB=  After the Bell
NA=  Not Available

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The Option Investor Newsletter                   Sunday 08-24-2003
Sunday                                                      2 of 5

In Section Two:

Watch List: Chips, Loans & Retail
Put Play of the Day: ESRX
Dropped Calls: PCAR
Dropped Puts: None

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Watch List

Chips, Loans & Retail

Maxim Integrated Products - MXIM - close: 43.78 change: +0.13

WHAT TO WATCH: Intel's news on Thursday night sent the markets
and the SOX soaring Friday morning.  Unfortunately, the rally
faded and it looks like the SOX has run out of steam.  Bears can
easily see the failed rally and are eager to push the group back
down to retest 400.  We're seeing a similar blow off in shares of
MXIM and we would not be surprised to witness MXIM retesting $41-



KLA-Tencor - KLAC - close: 57.05 change: +1.00

WHAT TO WATCH: One of the strongest chip stocks in the bunch,
shares of KLAC are still portraying a foreboding performance from
Friday.  Super aggressive bears could try and short this recent
rally in KLAC and target a pull back to its 50-dma near the $50
mark.  It looks like Friday's top in KLAC was near its upper
boundary in its rising channel.



Kohls - KSS - close: 61.10 change: -1.85

WHAT TO WATCH: The retail index (RLX) appears to be making a top.
We're calling it a bit early but should we see some follow
through then KSS might lead the way down.  A drop under the $60
mark could be a decent trigger for a move back towards its 200-
dma near $56.



Fannie Mae - FNM - close: 60.40 change: -0.85

WHAT TO WATCH: The financial sector seems to be deteriorating and
leading the way is FNM.  Actually both FRE and FNM have seen
better days.  FNM could be a bearish play candidate and we're
watching for a move under the $60 level of support.  Shares have
bounced twice in the last year or so near $59.00 so conservative
traders may want to see this lower level violated.


RADAR SCREEN - more stocks to watch:

DKS $35.69 - Another retailer but this one has dropped strongly
on very big volume in the last few sessions.  We'd consider a
trigger under Friday's low and target a move to $30.

BAC $78.38 - BAC has been on and off the watch list for a while.
The move on Friday was a big technical breakdown of its 50-dma
and support at $80.00.  Next stop looks like $75.00.

XLNX $29.23 - Another chip stock, the failed rally on Friday
occurred right near overhead resistance at $30-31.  Bears could
target a move back to its 50-dma near $26.00.

ASML $14.89 - Not a put play but stock traders might want to
watch ASML.  This chip stock might pull back to the $12.50 area.

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Put Play of the Day:

Express Scripts - ESRX - close: 63.48 change: -1.45 stop: 65.75

See details in play list


Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


PACCAR - PCAR - close: 85.69 change: -1.31 stop: 85.00

Calling it in.  Shares of PCAR have held up extremely well but
with the ominous performances on the Industrials and Nasdaq this
Friday we're going to take the money and run.  If the broader
indices start to pull back then we could see strong profit taking
in PCAR.  We'd rather close the play now and look for a bounce at
$80 again.

Picked on July 31 at $77.24
Change since picked:  +8.45
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:  1.15 million
Chart =




SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;

Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"

Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.

The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.

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The Option Investor Newsletter                   Sunday 08-24-2003
Sunday                                                      3 of 5

In Section Three:

Current Calls: BSX, EBAY, GILD, HIG, LLL, OMC, SPW
New Calls: None
Current Put Plays: XL
New Puts: ESRX, LEH, WLP

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Boston Scientific - BSX - cls: 65.61 chg: -0.89 stop: 61.99

Company Description:
Boston Scientific is a worldwide developer, manufacturer and
marketer of medical devices. The Company's products are used in a
broad range of interventional medical specialties. (source:
company press release)

Why We Like It:
This is the original play write up from Thursday:

Plenty of good news and a positive outlook have shares of BSX
significantly out performing most of the market the last couple
of years.  Fortunately, the rally does not appear to be over any
time soon.  As a matter of fact its next leg higher could be just
starting.  Since mid-June shares of BSX have struggled with
overhead resistance in the $65-66 range.  As of today, that
obstacle has been conquered.  Technical and fundamental
developments over the last few weeks have lead the way for
today's breakout.  In late July Goldman Sachs upgraded BSX to
"out perform" from "in-line" based on a number of factors and
claimed that fair value on the stock was closer to $77.  Around
the same time BSX announced it would split its stock 2-for-1
contingent on a shareholder vote to approve an increase in
authorized shares.  The vote is to take place on Oct. 6th and the
company expects the stock to split sometime in November.

Additional news out this August includes an FDA approval for
BSX's brain tumor device as well as the launch of BSX's next
generation intravascular ultrasound (IVUS) imaging system.  There
was some potentially bad news around the 13th of August when a
U.S. appeals court reversed a lower court patent case decision
against Johnson & Johnson that might leave BSX open to penalties.
However, most of Wall Street, including S&P, believe that BSX has
resources to handle the $324 million fine placed on it by a lower
court.  Given the small dip on the news and subsequent bounce in
BSX's share price it looks like investors are buying into recent
comments from Merrill Lynch that BSX could start taking market
share from JNJ in the drug-coated stent market.  That's big news
for an industry that MER believes will expand 60% to 80% in the
2nd half of this year.

Our initial profit target is $70 but we suspect BSX could drive
even higher (potentially $75).  We're going to initiate the play
at current levels with a stop at $62.00.

Update: Friday's performance looks negative but given the
rollover in the broader market indices it is not a surprise.  Now
that the $INDU and COMPX appear to be showing one-day (bearish)
reversals and BSX is back under $66.00 we would not suggest new
bullish plays at this time.  Patient traders might want to wait
and see if BSX bounces from the $64.00 level but we put emphasis
on the word "bounce".

Suggested Options:
Bullish traders can choose from September, October and November
calls on BSX.  Our preference is for the September 65s and 70s or
the October 70s (we'd probably lean towards the Octobers).

! We're not suggesting new entries until we see a bounce from
$64-65 or a move back above $66.00.

BUY CALL SEP 65 BSX-IM OI=32294 at $3.60 SL=1.85
BUY CALL SEP 70 BSX-IN OI=16405 at $1.45 SL=0.80
BUY CALL OCT 70 BSX-JN OI=  209 at $2.55 SL=1.20
BUY CALL NOV 70 BSX-KN OI= 2239 at $3.80 SL=1.85

Annotated Chart:

Picked on August 21 at $66.50
Change since picked:    -0.89
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:    2.78 million
Chart =


eBay, Inc. - EBAY - close: 110.98 change: -1.62 stop: 110.50*new*

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:
Did you harvest those gains on Friday morning?  As noted in
Thursday's update, the $114 level looked like a favorable level
for conservative traders to book some gains on our EBAY play, as
that was just above the downward-sloping upper Bollinger band.
Sure enough, the stock gapped higher on the bullish comments from
INTC, hitting an intraday high of $114.17 before the swoon began.
By the time it was all over, EBAY had printed a pretty ugly
looking bearish candle, closing just below $111.  As we've been
noting over the past few days, this play is getting a bit long in
the tooth, and traders currently in the play should be very
stingy about how much ground they're willing to give back. We're
still hoping for a rally up to the $115 level, but Friday's early
surge may have been all the bulls had to give.  Tighten stops
aggressively to $110.50 (just below Thursday's intraday low) and
use a rally up into the $114-115 area to exit the play with a
stellar gain.  We are not recommending new positions at this

Suggested Options:
We are not recommending new positions at this time.

Annotated Chart of EBAY:

Picked on August 12th at   $103.43
Change since picked:         +7.55
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =    6.67 mln
Chart =


Gilead Sciences - GILD - cls: 64.16 chg: -2.31 stop: 62.49

Company Description:
Gilead Sciences is a biopharmaceutical company that discovers,
develops and commercializes therapeutics to advance the care of
patients suffering from life-threatening diseases worldwide. The
company has seven marketed products and focuses its research and
clinical programs on anti-infectives. Headquartered in Foster
City, CA, Gilead has operations in the United States, Europe and
Australia. (source: company press release)

Why We Like It:
Shares of GILD have been a big winner for investors since they
broke out above the $35 level back in March.  The general market
optimism and a string of positive news for the biotech sector
fueled by clinical trial results pushed shares higher.  In mid-
July shares of GILD gapped higher on good news for its phase III
trials for Emtriva, another AIDS treatment.  Then in early August
shares dropped on a warning from the FDA over some marketing
practices.  GILD appeared to build a new base at $60.00 and the
bounce looked attractive as the technical oscillators began to
curl back into bullish patterns.

We suggested a call play on the breakout over $65.00 this
Tuesday.  Shares are back below this level now and might find
support at the $64 mark (look at a 30-minute chart and it's
easier to see).  The bad news is that Friday's candlestick is a
bearish engulfing candlestick pattern and that's obviously a
negative development.  We're seeing the same sort of pattern on
the NASDAQ Compx.  These types of patterns normally become one-
day reversal signals.  If GILD follows through and reverses trend
then we certainly don't want to be adding long positions.

Currently our stop loss is at $62.49.  More aggressive traders
willing to take the heat might want to use the simple 50-dma near
$61.49 as a stop.  If the 50-dma doesn't hold as support then the
$60 level might do the job.  Of course we'd be stopped out by
then but we can always evaluate a new play on a good bounce (or
buy puts if it breaks $60).

Suggested Options:
We are not suggesting new entries at this time.

Annotated Chart:

Picked on August 19 at $65.32
Change since picked:    -1.16
Earnings Date        07/31/03 (confirmed)
Average Daily Volume:    3.31 million
Chart =


Hartford Fin. Svcs - HIG - close: 53.11 change: -0.40 stop: 51.75

Company Description:
Hartford Financial Services Group is a diversified insurance and
financial services company.  The company provides investment
products, individual life, group life and group disability
insurance products, as well as property and casualty insurance
products in the United States.  HIG writes insurance and
reinsurance in the United States and internationally, and is
organized into two major operations: Life and Property &

Why we like it:
As we feared on Thursday, it looks like our HIG play is going to
test support again before making an assault on resistance.  The
weakness in the rest of the market weighed on shares of HIG,
resulting in a drop to close at the low of the day and just above
the $53 level.  In the process, the 10-dma ($53.60) was broken,
and we're now looking at gap support in the 452.00-52.50 area,
backed up by the 20-dma ($52.48) as critical support.  A rebound
from this area looks favorable for new entries, but this is an
aggressive strategy.  More conservative traders will need to see
the rebound extend back over the recent intraday high ($54.49)
and should use an entry trigger of $54.50.  While the bottom of
the early August gap is below $51, we're looking at the 50-dma
($50.74 and rising) as the real line in the sand.  For that
reason, we feel comfortable with our stop at $51.75, as a close
below that level would confirm that our bullish premise for the
stock has been refuted.

Suggested Options:
Shorter Term: The September 55 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 55 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 50 Call.

BUY CALL SEP-50 HIG-IJ OI=3062 at $3.60 SL=1.75
BUY CALL SEP-55 HIG-IK OI=2084 at $0.75 SL=0.30
BUY CALL OCT-50 HIG-JJ OI=  70 at $4.30 SL=2.75
BUY CALL OCT-55 HIG-JK OI=  56 at $1.45 SL=0.75

Annotated Chart of HIG:

Picked on August 14th at    $54.14
Change since picked:         -1.03
Earnings Date             11/05/03 (unconfirmed)
Average Daily Volume =    2.30 mln
Chart =


L-3 Communications -LLL - close: 49.40 change: -0.68 stop: 48.90

Company Description:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why we like it:
Our LLL play has certainly been an emotional roller coaster,
hasn't it?  First the stock threatened to violate our stop down
near $47, and then it looked like a breakout with Thursday's
intraday trade above the $50.50 level.  But the negative action
across the broad market on Friday did not do us any favors.  LLL
was once again rejected from resistance and dropped back for a
1.35% loss, ending just above the converged 10-dma ($49.30) and
20-dma ($49.10).  As a precautionary step against another
rejection at resistance, we tightened our stop to $48.90 on
Thursday, which is just below both of those moving averages.  Now
it's crunch time and LLL will need to prove itself to remain on
the Call list.  We are done with trying to buy the dips on this
defense-related stock.  The only entries that hold any appeal now
are on a breakout above $50.60.  With daily oscillators turning
down, the odds don't look good for that breakout move to
materialize, but we'll let our stop be the guide.  The 20-dma
provided strong support on the last dip and if it fails to do so
this time around, the risk is minimal to our stop.

Suggested Options:
Shorter Term: The September 50 Call will offer short-term traders
the best return on an immediate move, as it is currently at the

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 55 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 50 Call.

BUY CALL SEP-45 LLL-II OI= 282 at $4.90 SL=3.00
BUY CALL SEP-50 LLL-IJ OI=1355 at $1.30 SL=0.60
BUY CALL OCT-50 LLL-JJ OI=2710 at $2.20 SL=1.00
BUY CALL OCT-55 LLL-JK OI= 846 at $0.60 SL=0.25

Annotated Chart of LLL:

Picked on August 3rd at    $49.90
Change since picked:        -0.50
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      923 K
Chart =


Omnicom Group - OMC - close: 76.79 chg: +0.04 stop: 72.99

Company Description:
Omnicom is a leading global marketing and corporate
communications company. Omnicom's branded networks and numerous
specialty firms provide advertising, strategic media planning and
buying, direct and promotional marketing, public relations and
other specialty communications services to over 5,000 clients in
more than 100 countries. (source: company press release)

Why We Like It:
There appear to be a number of developing reasons for investors
to turn bullish on advertising stocks.  The general economy is
improving, we're starting the fall sports/tv line up, we'll soon
see ads for the 2004-2005 political season, and there is going to
be a free for all among the drug giants with the new ED drugs
hitting the U.S. market soon.  This hasn't been lost on shares of
OMC.  The breakout over $75-76 from a multi-week consolidation
looks like a great place to gauge new entries.

Our short-term target was $80 but we believe OMC can actually
trade to the $85 level.  Yet this can only occur if the markets
cooperate.  Shares of OMC, like many equities, gapped higher on
Friday morning only to give most or all of it back by the close.
OMC held up better than most stocks but that's still an ominous
pattern.  We suspect that patient traders will get another
opportunity to enter OMC on a dip.  We suggest that waiting for a
pull back to the $75 mark might be the best bet.

Wait for the bounce from $75.00.

Suggested Options:
Currently OMC has September, October and January calls to choose
from.  Our preference is for the September 75s and 80s.

BUY CALL SEP-75 OMC-IO OI= 1373 at $3.30 SL=1.65
BUY CALL SEP-80 OMC-IP OI= 1585 at $0.90 SL=0.45
BUY CALL OCT-75 OMC-JO OI= 1442 at $4.50 SL=2.25
BUY CALL OCT-80 OMC-JP OI= 1816 at $2.00 SL=1.00

Annotated Chart:

Picked on August 19 at $76.67
Change since picked:    +0.12
Earnings Date        07/29/03 (confirmed)
Average Daily Volume:     881 thousand
Chart =


SPX Corporation - SPW - close: 48.73 change: -0.84 stop: 46.75

Company Description:
SPX Corporation is a global provider of technical products and
systems, industrial products and services, flow technology and
service solutions.  The company offers networking and switching
products, fire detection and building life-safety products,
television and radio broadcast antennas and towers, life science
products and services, transformers, dock products and systems,
cooling towers, air filtration products, valves, back-flow
protection and fluid handling devices and metering and mixing
solutions.  The company also provides specialty service tools,
diagnostic systems, service equipment and technical information
services.  SPW services a broad array of customers in a variety
of industries, including chemical processing, pharmaceuticals,
infrastructure, mineral processing, petrochemical,
telecommunications, financial services, transportation and power

Why we like it:
As was the case with most stocks on Friday, our SPW play took a
much-needed day of rest, falling back below the $49 level.  As
noted when we initiated coverage of the stock, the $50 level was
likely to be solid resistance on the way up, so it was no great
surprise to see the stock turned back from Friday's intraday high
of $49.94.  This is also a clear demonstration of why we weren't
interested in trying to enter on strength when we initiated the
play last weekend.  Sure, we would have preferred a clean
breakout, but the market rarely gives us just what we want.  With
daily Stochastics starting to hook downwards, our attention needs
to focus back on support near the $47.00-47.50 area.  That is the
likely bounce point and where we'll want to look for new entry
points on that rebound.  With our stop resting at $46.75, we're
clearly expecting the 20-dma ($47.03) to continue providing
support like it did a couple weeks ago.  Once SPW manages to
clear the $50 level on a closing basis, then our focus can shift
to the upside potential, and we're still looking at the $53 level
as our initial target.

Suggested Options:
Shorter Term: The September 47 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 50 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 47 Call.

BUY CALL SEP-47 SPW-IW OI= 663 at $2.25 SL=1.00
BUY CALL SEP-50 SPW-IJ OI=3679 at $0.95 SL=0.50
BUY CALL OCT-47 SPW-JW OI=   6 at $3.00 SL=1.50
BUY CALL OCT-50 SPW-JJ OI=2503 at $1.65 SL=0.75

Annotated Chart of SPW:

Picked on August 14th at    $48.14
Change since picked:         +0.58
Earnings Date             10/27/03 (unconfirmed)
Average Daily Volume =       903 K
Chart =



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XL Capital Ltd. - XL - close: 74.29 change: -1.63 stop: 78.25*new*

Company Description:
XL Capital Ltd. provides insurance and reinsurance coverages and
financial products and services to industrial, commercial and
professional service firms, insurance companies and other
enterprises on a worldwide basis.  Insurance business written
includes general liability, other liability, professional and
employment practices liability, environmental liability,
property, program business, marine and energy, aviation and
satellite, as well as other product lines.  Reinsurance business
written includes treaty and facultative reinsurance to primary
insurers of casualty and property risks, as well as life
reinsurance, primarily European term assurances, group life,
critical illness coverage , immediate annuities in payment and
disability income business.

Why we like it:
Wasting no time in getting with the bearish program, our XL play
got slammed lower with the rest of the Financial sector, losing
more than 2% and closing at the low of the day.  Even better than
that though, the stock closed at a new 4-month low, eclipsing the
August 1st low of $74.99.  Adding conviction to this downward
move, the stock declined on heavy volume (60% above the ADV) and
daily MACD is now clearly rolling bearish from below the zero
line.  As noted on Thursday, the next obstacle for the bears to
contend with will be gap support in the $72.50-73.50 area, and
that could generate a near-term bounce.  But our sights remain
focused on the $70 level as our initial downside target, with the
potential for a further decline to $67 (trendline support) or
even $65, which is the PnF bearish price target.  Resistance
should now begin to firm up in the $76.00-76.50 area and failed
rallies below that level look attractive for new positions.  With
price pressing below the lower Bollinger band and gap support
less than a dollar away, we're not interested in breakdown
entries right now.  With the break below $75, it should be safe
to lower our stop to $78.25 this weekend, as that is just above
both the declining 20-dma ($77.59) and the intraday highs of the
past week.

Suggested Options:
Aggressive short-term traders will want to focus on the September
75 Put, as it will provide the best return for a short-term play.
Traders with a more conservative approach will want to utilize
the October contract, as it should not be as susceptible to time
decay issues in the near term.

BUY PUT SEP-80 XL -UP OI= 375 at $6.50 SL=4.50
BUY PUT SEP-75 XL -UO OI= 352 at $2.65 SL=1.25
BUY PUT OCT-75 XL -VO OI= 297 at $3.60 SL=1.75

Annotated Chart of XL:

Picked on August 21st at   $75.92
Change since picked:        -1.63
Earnings Date            10/30/03 (unconfirmed)
Average Daily Volume =      813 K
Chart =


Express Scripts - ESRX - close: 63.48 change: -1.45 stop: 65.75

Company Description:
Express Scripts provides health care management and
administration services on behalf of clients that include health
maintenance organizations, health insurers, third-party
administrators, employers and union-sponsored benefit plans.  The
company's fully integrated pharmacy benefit management services
include network claims processing, mail pharmacy services,
benefit design consultation, drug utilization review, formulary
management, disease management, medical information management
services and informed decision counseling services through its
Express Health Line division.

Why we like it:
After tracing out what looked like a classic double-top pattern
in June and July, shares of ESRX broke down out of the ascending
channel in lat July, not finding support until reaching the $65
level, $10 below the double top and conveniently right at the
threshold of the double-top breakdown.  In early August, the
stock broke below that level, confirming the double-top and
falling a bit lower to find support at $60.  That resulted in a
fairly tepid bounce back to the $65 level, which now appears to
be acting as resistance.  ESRX rolled over from just above that
level on Friday and the more than 2% slide was enough to give a
bearish crossover signal on the daily Stochastics.  The PnF chart
paints a pretty bearish picture as well, with the big Sell signal
in July producing a bearish price target of $52.  The early
August decline down to $60 broke the bullish support line, so
that won't really be a significant obstacle on the way down.

New entries on a rebound failure between here and $65 look
favorable, as do entries on a break below $63, which will break
the intraday support that has been holding over the past 9
sessions.  As would be expected, initial support will be found
near the early August lows near $60, followed by the 200-dma
($58.29).  Either of those levels could produce a near-term
bounce, but so long as the pattern of lower highs remains in
force, that bounce will likely only produce another entry point.
We're targeting a decline down to the $55 level, which looks like
pretty solid support.  Set stops initially at $65.75, which is
just above the horizontal topping formation of the past 2 weeks.

Suggested Options:
Short-term traders will want to focus on the September 65 Put, as
it will provide the best return for a short-term play.  Traders
with a more conservative approach will want to utilize the
October contract, as it should not be as susceptible to time
decay issues in the near term.

BUY PUT SEP-65 XTQ-UM OI= 697 at $3.20 SL=1.50
BUY PUT SEP-60 XTQ-UL OI=2556 at $1.20 SL=0.60
BUY PUT OCT-75 XTQ-VL OI=  35 at $2.40 SL=1.25

Annotated Chart of ESRX:

Picked on August 24th at   $63.48
Change since picked:        +0.00
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =   1.41 mln
Chart =


Lehman Brothers - LEH - close: 64.41 change: -0.74 stop: 67.25

Company Description:
Through its subsidiaries, LEH constitutes one of the leading
global investment banks, serving institutional, corporate,
government and high-net-worth individuals clients.  The company
is engaged primarily in providing financial services, including
securities writing and direct placements, corporate finance and
strategic advisory services, private equity investments and
securities sales and trading.  Completing its array of banking,
research and trading capabilities, LEH also engages in the
trading of foreign exchange, derivative products and certain

Why we like it:
That's right, we're going to take another run at the downside in
shares of LEH.  Recall last month we had a solid downside play
and with the rebound from the $60 level looking like it is
running out of steam, now looks like a good time to re-enter the
fray.  Ever since the middle of June, LEH has been drastically
underperforming the overall Brokerage sector (XBD.X), and a big
part of that relative weakness may be due to investor
expectations that the company may have gotten hurt during the
recent bond selloff, as it is one of the larger bond trading
firms.  We're going to get a peek at whether those fears are
based on reality in about 3 weeks when LEH reports earnings on
September 18th.  In the meantime, we're looking for continued
weakness and Friday's sharp intraday reversal is a good start.
The $66 level has been solid resistance ever since it failed as
support roughly a month ago, and the 50-dma ($66.23) falling
towards that level is only going to reinforce that resistance.
Taking a look at the PnF chart, we can see that it is still on a
Sell signal and is still working with a bearish price target of

Another failed rebound below the $66 level looks attractive for
new entries, although current levels look good as well, with
daily oscillators just starting to tip bearish.  Once back under
$63 (the 50% retracement of the March-June rally), the next area
of support will be the 200-dma ($61.15) followed by horizontal
support at $60.  We're expecting a breakdown below that level
this time around, and if the XBD index begins to show any real
weakness (beginning with a close back under its 50-dma), then we
ought to see the $55 level coming into play in short order.  That
will be our target for the play.  More aggressive traders can
target a decline down to the $52 PnF target, but we don't want to
be greedy.  Set stops initially at $67.25, which is solidly above
both the 50-dma and the upper Bollinger band at $66.61.

Suggested Options:
Short-term traders will want to focus on the September 65 Put, as
it will provide the best return for a short-term play.  Longer-
term traders looking for a move down towards the $60 level or
below will want to utilize the October 60 contract, which
although it is currently out of the money, should provide enough
time to achieve profitability before time decay has a pronounced

BUY PUT SEP-65 LEH-UM OI=3407 at $2.25 SL=3.50
BUY PUT SEP-60 LEH-UL OI=3354 at $0.70 SL=1.25
BUY PUT OCT-60 LEH-VL OI=6053 at $1.60 SL=0.75

Annotated Chart of LEH:

Picked on August 24th at    $64.41
Change since picked:         +0.00
Earnings Date             09/18/03 (unconfirmed)
Average Daily Volume =    3.02 mln
Chart =


Wellpoint Health Ntwk - WLP - cls: 75.65 chg: +0.01 stop: 77.51

Company Description:
WellPoint Health Networks Inc. serves the health care needs of
more than 13 million medical members and over 49 million
specialty members nationwide through Blue Cross of California,
Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of
Missouri, HealthLink and UNICARE. WellPoint offers a broad
spectrum of quality network-based health products, including open
access PPO, POS and hybrid products, HMO and specialty products.
Specialty products include pharmacy benefit management, dental,
medical management, vision, behavioral health, life and
disability insurance, long term care insurance, flexible spending
accounts, COBRA administration and Medicare supplements.
(source: company press release)

Why We Like It:
The last several weeks have been pretty ugly for the health care
sector.  Previous investor darlings like WLP have been getting
taken to the woodshed. This weakness may come as a surprise to
many investors as most healthcare/insurance companies like WLP,
UNH, and ATH have all turned in strong earnings results.  WLP
itself beat estimates by 10 cents.  Making the whole situation
even more odd are comments from Wall Street analysts worried
about slower enrollment when most of these companies guided
higher for Q3 and Q4 based on higher enrollment expectations.
Whatever the truth is it is easy to see that the new trend for
WLP is down.  To make matters worse for Wellpoint there was
recent news that they might be part of an investigation by the
SEC over their failed bid to acquire Maryland's CareFirst
BlueCross BlueShield in a $1.37 billion buyout.

Current shares of WLP are right at support of $75.00 and its
simple 200-dma.  We are going to use a TRIGGER at $74.95 to open
the play.  Until WLP trades at or below our trigger we're just
spectators.  However, if we see a bounce then more aggressive
traders might want to consider opening bearish positions on
another failed rally under $80.  If we are triggered we will use
an initial stop loss at $77.51.  There is strong potential for
support near the $72.50 level but our first target will be

Suggested Options:
WLP currently has September, October and January options.  Our
preference is for the September & October 75's and 70's.

BUY PUT SEP 75 WLP-UO OI=1464 at $2.05 SL=1.00
BUY PUT SEP 70 WLP-UN OI=1424 at $0.65 SL= --
BUY PUT OCT 75 WLP-VO OI= 482 at $3.40 SL=1.75
BUY PUT OCT 70 WLP-VN OI=2234 at $1.65 SL=0.85

Annotated Chart:

Picked on August 24 at $xx.xx
Change since picked:    +0.00
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:     1.3 million
Chart =

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The Option Investor Newsletter                   Sunday 08-24-2003
Sunday                                                      4 of 5

In Section Four:

Traders Corner: Spread The Joy – Along With The Mayo
Traders Corner: Where is the Dow Going?
Traders Corner: Elliott Wave Plays
Brokers Corner: Readers Write

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One More Week
By Mark Phillips

The past 2 months have been excruciatingly tedious for those of us
looking for some sort of resolution to this incessant range the
market has been in since the middle of June.  As August has
progressed the action has become more and more irritating,
primarily due to the absolute nonexistence of a tradable trend.
My nature is not such that I enjoy being in and out of trades
several times per week.  I like to take a position when the
technicals tell me it is time, ride that trade for a period of
days to weeks to even months and then exit when the technicals
once again tell me it is prudent to do so.  This program-trade
driven chop has been trying to most traders and if you had the
foresight to step away from the market earlier this summer, I
believe you've saved yourself a lot of brain damage.

The good news is that I think things are about to change and for
the better.  We've had numerous setups over the past several
weeks, all of which have shown the beginnings of weakness in
various areas of the market.  But time and again, each technical
breakdown has been propped up by unseen hands.  Market
manipulation?  I won't go that far, although I won't rule it out
either.  No, this is typical of the end of summer.  Low volume,
and lots of luck in finding a solid and dependable trend.  I
expect to see more of the same next week.

Alright, let's look at the facts.  The bullish percent charts have
been telling us for weeks that the bulls are carrying the majority
of the risks in the market, but still the markets refuse to sell
off beyond the bottom of the recent range.  In fact, last week,
the DOW finally broke above its June 17th high, closing at a new
high of 9428on Tuesday.  That gave us the Dow Theory bullish
confirmation, but remember the 9500 level I mentioned last week?
Isn't it curious how Friday's intraday high was right at that
level?  I guess I'm not the only one that has noted its
significance.  That was a pretty big intraday reversal on Friday,
dropping the old economy index back near 9350 at the close.

The S&P 500 reversed just below its June/July highs near 1016 and
still looks top-heavy.  Clearly the leader to the upside the past
several weeks has been the NASDAQ, which tagged a new high for the
year at 1812 on Friday, before sliding sharply into the close.  It
is hard to make either a bullish or bearish case based on the
weekly Stochastics readings, which have all declined well below
overbought, and are now threatening to turn bullish again.

An argument can be made for the trading range of the past two
months in the DOW and S&Ps as a rectangular
consolidation/continuation pattern, with potential upside equal to
the initial move off the March lows.  I think that's ridiculous
from a fundamental basis, but so is the current strength in the
market.  An opposite argument can be made (which I happen to like
much better) that the past two months have been a topping
formation and once normal volume patterns return after Labor Day,
we'll head right back down.

I think I've actually got some light to shed on this debate, but
am far too short on time to delve into it this weekend.  But I'll
sit down sometime before Monday and put my thoughts on the subject
into a coherent form for Monday's Trader's Corner article.  It was
actually supposed to be last week's article, but I spent most of
the week dueling (and losing) with technology demons.  I believe
they've all been exorcised from my workspace, so will deliver on
last week's article this week.

I'm not even going to address the status of the bullish percent
charts this week, other than to update their readings for you.
Alright, I will make this one observation.  Across the board, the
patterns of weakness that we've seen in the bullish percents has
been reversing itself.  Take a look at those bullish percent
SharpCharts and I think you'll see what I mean.  Once again, I'll
be looking for a lower high failure to confirm internal weakness
in the major indices.

Bullish Percent Readings

NASDAQ-100 - 75% Bear Correction
NASDAQ Composite - 70.57% (Bull Confirmed)
DOW - 80% (Still in Bull Correction)
S&P 500 - 77.45% (Bull Correction)
S&P 100 - 84% (Bull Confirmed, at all-time highs)

There are some changes there, but I'm having a hard time putting
too much faith in their readings until we see some normal volume
trading return.  I know I keep harping on that issue, but I really
do think it is important.  How important?  I idled all of my
short-term trading accounts 2 weeks ago and will not reopen them
until the Tuesday after Labor Day.  Sure I will probably miss some
profitable trades, but I've grown weary of trading within such a
rather tight range in very choppy fashion.  When volume returns,
the range should expand, and we'll see what this market has under
the hood.  Unless I miss my guess, it is just one very tired
hamster that is very near total exhaustion.  He's continuing to
keep things going on the expectation that help will arrive after
Labor Day.  I wonder how he'll respond when that 'help' turns out
to be a band of cheerleaders and a maintenance technician to
lubricate the wheel?

Speaking of cheerleaders, have you noticed the infernal din of
pundits and self-proclaimed experts that are now telling us "this
time it is different"?  It isn't different, it is exactly the same
and I pity the uninformed investors that will blindly believe the
market is back on the road to new highs.  Obviously Harry Dent is
the most deluded of the bunch calling for DOW 35000 by 2008 based
on -- get this -- a comparison of the price action of the auto
index from 1922-1929.  I want some of what he's been smoking!  The
problem is that I know how the siren's song can draw in the
uninformed public to believe they are going to get a second chance
at the roaring 1990s.  Fortunately we won't have to count
ourselves among them.

The other thing in the Financial press that is absolutely driving
me nuts is the frequent assertion that this drop of the VIX under
20 is somehow different.  Bull!  When they can show me historical
evidence of the VIX dropping from the 20 level to as low as 15,
while at the same time, the market actually rallies, then I'll
consider listening to their argument.  Until then, they are just a
bunch of idiots.  I don't normally use such terms to describe
other analysts, but how much clearer does it have to get.  Look at
every VIX below 20 for the past 5 years.  Can you find a single
example where the VIX continued to fall and the market rallied?
Of course not!  The reason why is that there is too much
complacency in the market and no wall of worry to climb.

I'll delve into the details of this in Monday's article, but for
now, that ought to set the stage for what I expect over the near-
term.  It was really a busy week on the playlists, so I'm going to
cut the commentary short here and dive into what transpired there.


ADBE - Sigh.  ADBE was looking so good from the bearish
perspective, but you know what they say, "Stuff Happens".  I'm not
at all happy about it, but I wouldn't have played it any
differently if I had it to do again.  Details on the drop below.

DJX - So do you have any doubts about the significance of the $95
level in the DJX?  On Friday's early ramp, that was exactly the
high before the steady bleed lower right into the closing bell.
It has been a bumpy road getting to this point, but I think we've
reached the tipping point.  Look for one more week of irrational
summer action and then the real trend can get underway after the
Labor Day weekend.  Traders still looking for an entry into the
play should continue to use failed rallies below $95 as the entry
trigger.  We're maintaining our stop at $95.50, as a close over
that level would indicate significantly more bullish power than I
currently think exists in the market.

BBH - I honestly didn't think the Biotechs would be able to battle
back to fulfill our entry target in the $132-135 area, but they
nailed it almost perfectly on Friday.  Chalk up another new
bearish Portfolio play.  Details down below.

GM - What was it I said last week?  "Don't look for any excitement
here."  Boy, was I wrong!  Just when it was least expected, the
latest irrational spike arrived, fulfilling my optimistic entry
parameters and GM is now in the Portfolio.  Details below.

LEH - It's the paragon of weakness in the Brokerage sector and on
Friday, LEH gave us the entry setup we were looking for, failing
right at the $66 resistance level.  Make that three new Portfolio
plays this week.  You know where to find the full scoop!

Watch List:

WMT - Am I being too stingy in my requirement for a rejection from
the $60 level before playing WMT to the downside?  I really don't
think so, especially now that the PnF chart has logged a new Buy
signal.  Friday's sharp reversal certainly looks bearish, and the
bearish divergence on the daily Stochastics (5,3,3) certainly
reinforces that view.  But with the Retail index (RLX.X) yet to
give any defined sign of weakness and WMT still above trend, I
think caution is warranted.  We might get our entry next week
before the September swoon I'm expecting, but with 3 new Portfolio
plays already this week, I'm content to let this one simmer for
another week.

QQQ - Just last week, I was thinking our QQQ play was setting up
for a failed rally below the $32 level.  Needless to say, I was a
bit surprised by the strength in the NASDAQ, the majority of which
I think we can attribute to the Semiconductor sector.  QQQ surged
to as high $33.37 on Friday (a new 52-week high) before dropping
significantly into the close.  Was that the high for this cycle?
I honestly think it was, but I'm going to abide by our entry
strategy, and that means waiting for a close back under $32 before
playing.  Once filled, we'll use a tight stop at $34.50.  QQQ
shouldn't be able to push through the strong resistance at $34.00,
but that's what stops are for.

SMH - We took our shot at a bearish play right at resistance and
after a month of back and forth indecision, the bulls ran with the
ball and stopped us out.  That's precisely why we had such a tight
stop.  Last week I said that if we were stopped out, we'd cycle
CMH right back onto the Watch List and so we have.  Now we'll look
to target shoot an entry near higher resistance in the $39-40
area.  We may miss it completely, but if filled, the play ought to
be a runner as it becomes clear that any bullish hopes for a
stellar second half are badly misplaced.

Radar Screen:

HD - So here's the question that's plaguing me this week.  Did I
do the right thing by getting aggressive with the stop on our HD
play?  After stopping us out for a paltry gain, the stock shot
sharply higher around earnings and is now right back where it was
when we were stopped out.  In retrospect, I think it was the
prudent course of action, and I'm still watching for another
prudent entry into the play.  Perhaps  on another failure below
the $35 level, but I'm not willing to be aggressive, considering
the way in which the stock continues to test its bearish
resistance line on the PnF chart.

FNM - I keep waiting for FNM to pop up to give us some sort of a
failed rally on which to base a new entry, but the stock keeps
weakening and continued rumors about financial problems at the
company as a result of its derivative portfolio certainly aren't
helping.  The stock is currently resting just above strong support
in the $58-60 area, so this clearly isn't the place to enter.  My
preference right now is for a failed pop into the $65-66 area,
from which we could target a decline down to $51, the current
bearish vertical count from the PnF chart.  Of course, a trade at
$66 would generate a new Buy signal and could change the overall
picture significantly.  For now, I'm content to wait and see.

Closing Thoughts:

One more thing.  Last week I talked about the lack of a bullish
confirmation with respect to Dow Theory.  Well Monday's surge
above 9400 provided that confirmation with new highs for this
cycle in both the INDU and the TRAN.  So that confirmed the status
of the cyclical bull market in which we find ourselves.  What I
think is worth noting is that Dow Theory is not a trade timing
system.  The last clear confirmation we got was a bearish one back
in October, within a few days of the bottom was put in.  Obviously
new bearish positions taken on that bearish confirmation would not
have done well.  And I suspect new bullish positions taken on last
Monday's bullish confirmation will do correspondingly poorly.

I dispensed with the majority of my technical commentary on the
broad markets this week for two reasons.  First, I want to devote
some time this weekend to Monday's Trader's Corner article, which
I think you'll find interesting as we head into the end of August.
But more importantly, I don't have any great faith in my ability
to call market direction this week.  Simply put, I think the top
is in and we're about to begin the trek down towards the next
important low, probably in the mid-October timeframe.  The problem
I have with that statement is that I think I've said something
similar on more than one occasion over the past couple months.
Check with me next week and I'll have a more confident prediction
of where we're headed.  I consider the next week to be a good one
to take one more final trip with the family or enjoy the summer

While I'll be away from the markets for at least the first part of
next week, it won't be for any leisure activities.  My number came
up and I'll be doing my civic duty and reporting for jury duty
first thing Monday morning.  So do me a favor and keep the markets
orderly for me, so we can all have fun together after the Labor
Day weekend.

Have a great weekend!


LEAPS Portfolio

Current Open Plays



DJX    07/31/03  '03 $ 92 DJV-XN  $ 3.80  $ 3.90  + 2.22%  $95.50
                 '04 $ 92 YDK-XN  $ 8.20  $ 8.40  + 2.22%  $95.50
BBH    08/22/03  '05 $125 XBB-ME  $14.60  $14.60  + 0.00%  $138
                 '06 $120 YEE-MD  $15.50  $15.50  + 0.00%  $138
GM     08/21/03  '05 $ 35 ZGM-MG  $ 4.30  $ 4.90  + 0.00%  $42.00
                 '06 $ 35 WGM-MG  $ 6.80  $ 7.10  + 0.00%  $42.00
LEH    08/22/03  '05 $ 65 ZHE-MM  $ 9.80  $ 9.80  + 0.00%  $70.00
                 '06 $ 60 WHE-ML  $10.00  $10.00  + 0.00%  $70.00

LEAPS Watchlist

Current Possibles



WMT    08/03/03  $60           JAN-2005 $ 55  ZWT-MK
                               JAN-2006 $ 55  WWT-MK
QQQ    08/10/03  $31.50-32.00  JAN-2005 $ 30  ZWQ-MD
                               JAN-2006 $ 30  WD -MD
SMH    08/24/03  $39-40        JAN-2005 $ 35  ZTO-MG
                               JAN-2006 $ 35  YRH-MG

New Portfolio Plays

BBH - Biotechnology HOLDR $131.30  **Put Play**

After the apparent breakdown in the Biotechnology sector, I must
admit I had my doubts as to whether the BBH would be able to
struggle back to give us a favorable entry point.  But the rampant
(and irrational) bullishness came through again last week,
propelling the NASDAQ to new highs for the year and BBH
reluctantly went along for the ride in what looked like a bear
flag formation that is also tracing out the right shoulder of a
H&S top formation that has its upward-sloping neckline at roughly
$126.  It isn't perfect, but I like the way the PnF chart will
finally give a Sell signal with a trade at $124.  So clearly we
have some hurdles to cross on the way down before we'll have
confirmation of the prudence of this aggressive play, but with the
sharp reversal across the entire market on Friday, I like our
odds.  Recall that our targeted entry was for a rally failure in
the $132-135 area, and BBH delivered perfectly, topping out just
under $135 and then falling back under $132 by the close.  In
keeping with the aggressive nature of this play, we'll have to
start with a pretty wide stop.  I'm choosing $138, just above the
top of the H&S pattern.  While we're initially targeting a break
below $120, I've got my eye on an eventual decline down near $100,
which has been a pivotal level in the past.

BUY LEAP DEC-2005 $125 XBB-ME $14.60
BUY LEAP DEC-2006 $120 YEE-MD $15.50

GM - General Motors $39.13  **Put Play**

After last week, I'm sure you can all now understand reticence
about entering this play when GM was trolling around the $36
level.  Sure, it looked weak there, but after being burned a few
times in the last year, I 'knew' there would be another irrational
spike in the stock and that would be our opportunity to play.  So
what was the cause behind GM's bullish move last week, which
really was capped off with Thursday's failed rally just below $40?
Was it the announcement that the company would seek shareholder
approval for its Hughes deal?  How about the news that the company
would be assembling a portion of its Cadillac line in China?
Quite honestly, I don't think that has anything to do with it.  GM
was simply caught up in the buying frenzy (especially on Thursday
and then Friday morning) in the broad markets and when that
artificial prop was removed, the stock dropped back under the pull
of gravity.  Make no mistake, we're ahead of the game here in
terms of technicals, as the PnF chart is still on a Buy signal.
But I think that resistance at $40 will prove to be the bulls'
Waterloo.  I've enumerated the fundamental reasons why the stock
should absolutely tank and now we'll see if the market wakes up
from its stupor and agrees.  Our initial target will be a return
to the March lows at $30 and then we'll look for a downward
continuation to new multi-year lows.  Remember, the longer-term 2-
point box size PnF chart is still on a powerful Sell signal and
has a target of $12.  It would take a trade at $42 to generate a
new Buy signal on this timeframe, so that's where we'll place our
stop.  I don't expect this play to move quickly, but we've got
plenty of time on those '05 and '06 LEAPS for it to play out over
the next several months.

BUY LEAP DEC-2005 $35 ZGM-MG $4.30
BUY LEAP DEC-2006 $35 WGM-MG $6.80

LEH - Lehman Brothers $64.41  **Put Play**

Oh, if only I had been quicker on the draw, we would have been in
this play up near $70, but there's no use crying about the trade
we missed.  I gradually lowered the entry target into the $66-67
area last week and with the help of the bullishness in the broad
market, LEH finally got there on Friday morning, with a quick
squirt up to $66.05 and then a pullback that lasted right into the
closing bell.  Looking first at relative performance, LEH has been
grossly underperforming the Broker/Dealer index (XBD.X) ever since
tagging its June highs  and the relative strength chart is trading
near 2-year lows and appears ready to break down.  If the XBD
index starts to weaken, then it should serve to pound LEH that
much lower.  Taking a look at the PnF chart, we have a solid Sell
signal and a bearish price target of $52.  There's potential
support near $60-61, reinforced by the 200-dma ($61.15).  But once
under that level, LEH ought to seek out the $55 level and if I'm
right, the $52 level is definitely a viable target.  A big part of
what I think is weighing on the stock lately is investor fear that
LEH (along with some other major bond trading firms) may have
taken a serious blow from the sharp selloff in bonds over the past
couple months and we ought to get a glimpse of whether there is
any truth to that suspicion when the company reports earnings on
September 18th.  The $66 level has been strong resistance over the
past month and with the 50-dma ($66.23) now nearing that level,
this resistance should get even stronger.  Even if it is breached
near-term, we have solid resistance in the $68-69 area that should
squash any rogue bullish move.  Looking at the PnF chart again,
LEH won't print a Buy signal until it trades $70, so that's where
our stop goes.  For those of you that may have missed the entry on
Friday, I still like failed rallies in the $66-67 area for new

BUY LEAP DEC-2005 $65 ZHE-MM $ 9.80
BUY LEAP DEC-2006 $60 WHE-ML $10.00

New Watchlist Plays



ADBE - $36.21 Alright, that was just downright unpleasant!  I knew
ADBE was going to find support in the $30-31 area, as it was not
only gap support, but the site of the stock's PnF bullish support
line, but with a PnF Sell signal in place, I was sure any rebound
would be tepid at best.  Well, Monday's rocket launch higher,
spelled doom for our play as the stock rocketed through our $36
stop on the heels of the Piper Jaffray upgrade.  The remainder of
the week proved the wisdom of keeping our stop set at $36, as that
trade generated a new PnF Buy signal and the subsequent rally shot
ADBE as high as $39.19 at Friday's early high before some weakness
was finally seen.  Given the opportunity, I would take this trade
again based on the technical setup, and other than perhaps being
more aggressive with our stop like we did with HD a few weeks ago,
I wouldn't have changed a thing.  The underlying bullishness in
the market just jumped up and bit me again.

SMH - $34.15 We had to take the shot on our bearish play on SMH,
as the $400-410 resistance in the SOX, combined with $33
resistance on the SMH looked like an excellent point to try
picking a top in this momentum group.  Things were looking good a
couple weeks ago with the apparent breakdown, but as we can see,
the group got launched higher 2 weeks ago and that vertical launch
never even slowed down until the INTC euphoria wore off on Friday
after the opening hour.  By that time, we were long gone from the
play, as our $33 stop was clipped shortly after the open on
Monday.  I would take this play again if given the opportunity,
simply based on the risk-reward and the clearly defined resistance
level.  Chalk it up as a busted play.  The downside still looks
far more favorable than upside for this group, but there is no way
I would have considered ignoring the stop on this play.  Note that
SMH was up nearly $5 from that point early on Friday.  That's more
heat than we should be willing to take, regardless of our risk
profile.  As I mentioned a couple weeks ago, if stopped out, I'd
be looking to re-enter the play and I'm sticking with that notion
here this week.  We're not doing a new play writeup, but note that
SMH is back on the Watch List this week, with an entry trigger at
$39-40.  There's very strong resistance in the $40-42 area, so
we'll start with a more liberal stop at $43.  Take note that we
won't be entering into strength, as we'll need to see a reversal
from that level in order to be tempted into the play a second

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Note: Options involve risk. Risk disclosure:



Spread The Joy – Along With The Mayo
By Mike Parnos, Investing With Attitude

The Ponderosa was an impressive ranch.  Ben, Hoss, Adam and Little
Joe lived pretty well off that spread.  The Jiffy Peanut Butter
Company does very will with their spread.  And Heidi Fleiss has
made a fortune with her's.

So, it only makes sense that we, at the CPTI, should profit by
creating spreads of our own.  Today we're going to look at
vertical call and put spreads – which are created to take
advantage of large up or down movement in a stock/index.  The
risks are limited and the potential profit (if you pick the
direction right) is attractive.

So, get out your bread and let's see if we can make a PB&J
sandwich out of the stock market.

Bull Call Spread = Bullish
A bull call spread is the purchase of a call and the sale of a
higher strike call with the same expiration date. The purpose of
the sale of the higher strike call is to take in a credit that
serves to reduce the risk. It also puts a cap on potential
profits, but since, at the CPTI, our emphasis is to limit risk, we
choose to use spreads instead of a pure directional put or call

Our example will be based on a 10-contract position. If you are
bullish on the NASDAQ, a bull call spread might look something
like this:

It's August and the QQQs are trading at $32.44.
1. Buy the January 04 $32 call @  $2.60 = $2,600
2. Sell the January 04 $35 call @  $1.20 = $1,200
Total Risk: $1.40 = $1,400
Let's look at what we have created. In the bullish scenario, we're
risking a grand total of $1,400. The maximum that we can collect
if the QQQs trade through the $35 sold strike price is $3,000 (10
contracts) -- the difference between the $32 and $35 strike
prices. At expiration, both options will be exercised and your
profit will be $1,600 ($3,000 - $1,400).

Notice that the further you go out of the money, the less the
risk, but the greater movement necessary to achieve profitability.
If, in the bullish scenario, we went further out of the money, the
debit would be less and the potential percentage of profit would
be higher. The Jan. $33 calls cost $2.10 and the Jan. 04 $36 calls
would bring in $.90. The debit would be only $1.20, but the QQQs
would have to close beyond $36 to achieve maximum profitability.
That's a lot to ask.

Bear Put Spread = Bearish
If you are bearish on the NASDAQ, the scenario is the same, just
bass-ackwards. The numbers aren't too different. At this writing,
they're actually a little better.
1. Buy the January 04 $32 put @ $2.05 = $ 2,050
2. Sell the January 04 $29 put @  $.95 = $950
Total Risk: $1.10 = $ 1,100
In the bearish scenario, we're only risking a grand total of
$1,100. The maximum that we can collect if the QQQs trade through
the $29 sold strike price is $3,000 (10 contracts) -- the
difference between the $32 and $29 strike prices. At expiration,
both options will be exercised and your profit will be $1,900.

When Do You Take The Money and Run?
Now, keep in mind, we're dealing with a five-month position. A lot
can happen in five months. It likely won't take the full five
months for the QQQs to trade through the short strike. If, in the
bullish scenario, the QQQs trade through $35 in just two months,
we would need to evaluate the position. We may have decisions to

You would be able to liquidate the position for an estimated
credit of about $2,200. Your cost is $1,400, therefore, your
profit would be appx. $800. That represents 50% of your profit
target. Is that enough? Here's the question you have to ask
yourself: Are you willing to risk the $800 you made during the
first two months for the chance of making the additional $800
profit that you would make if you held the position to its

Obviously, you have to re-evaluate. There are a lot of questions
to answer that will help you make your decision. Is the chart
still trending up or is it just a bear market bounce? Is there any
serious resistance at the $35-36 level? Has there been good volume
on the up days, and lower volume on the down days?

Your choices are:
1. Take your profits on half your position and let the rest run
with very tight mental stops and a lot more self-discipline than
you have every time you open the refrigerator door.
2. Liquidate the position, take the $800 profit.
3. Roll the dice and let the position run - lighting candles,
massaging your rabbit's foot, and your four-leaf clover for the
last two months. This is the appropriate choice for you option
traders that can't pick a winner in a one horse race.

In bull call spreads, the curve on the graph tells us that, as the
stock goes up, it reaches a point in time at which the price of
the long option increases more slowly. At that point, it's
questionable whether you should remain in the trade. It might be
time to "take the money and run."

There are no rules set in stone. You're going to have to make some
choices. Remember, the more percentages you have in your favor,
the better chance you have for success.

SEPTEMBER POSITIONS – Remember that September is a five-week
option cycle.  Expiration is Friday, September 19th.

September Position #1 – SPX Iron Condor – SPX @ 993.06
S & P 500 Index = SPX
Sell 10 contracts of SPX 1040 Sept. calls
Buy 10 contracts of SPX 1050 Sept. calls
Look for a net credit of $1.30.
Sell 10 contracts of the SPX 950 Sept. puts
Buy 10 contracts of the SPX Sept. 940 puts
Look for a net credit of $1.40
Total credit of $2.70 ($2,700).  We have a huge maximum profit
range of 950 to 1040.  That's peace of mind!  More aggressive
investors can narrow the range a bit and take in more money.   At
993.06, we're in good shape – for now.

September Position #2 – SMH Sell Straddle
Semiconductor Holders Trust = SMH
As so many astute CPTI students pointed out, the premiums I listed
here on Sunday were unrealistic.  Well, I checked and, indeed, it
was too good to be true.  I had grabbed the November premiums
instead of the September premiums.  Picky, picky, picky.  So, the
SMH trade became null and void – and not worth pursuing.

September Position #3 – COF Sell Straddle – COF @ $51.66
Capitol One Financial = COF
Sell 10 contracts of COF Sept. $50 calls @ $2.35
Sell 10 contracts of COT Sept. $50 puts @ $2.50
Total credit of $4.85 ($4,850).  We will make some profit if COF
finishes anywhere between $45.15 and $54.85.  The closer COF
finishes to $50, the more money we'll make.  Our bailout points
are the parameters of our profit range.  Maximum potential profit
is, again, $4,850.  COF moved up a bit, but at $51.66 we're still
comfortably in profit territory.

September Position #4 – EBAY Iron Condor  -- EBAY
We were going to put on an Iron Condor with a $95 to $110 range.
However, EBAY gapped way up early in Monday's trading session.
That changed the scheme of things and it was not prudent to enter
the EBAY trade.  If EBAY would have retreated back down to the
$103 level, we might have entered the trade, but it did not.   It
was a wise choice since EBAY has continued on up to $112 and we
would have been in a precarious position.

For reasons discussed above, we did not enter into two of the
proposed September positions.  Here are a few replacement

Position #1 – HWP (Hewlett Packard) Bear Put Spread
Let's use the strategy we discussed above.  HWP is weak and may
return to the $15 range.  So, lets:
Buy 10 contracts of the HWP Feb. 2004 $20 puts @ $2.25
Sell 10 contracts of the HWP Feb. 2004 $15 puts @ $.40
Total debit of $1.85.  Potential max profit of $3.15.  In reality,
if HWP makes the move down, it will probably happen on the
coattails of a market move down.  It shouldn't take until
February.  I'd gladly accept a profit of $800-900 and close the
position early if the opportunity presented itself.

Position #2 – OEX – Bearish Calendar Spread – OEX @ $497.42
Maybe Friday was a reversal day.  The market has run up pretty
fast and perhaps it's time to give some gains back.  Let's see if
we can take advantage of this with a calendar spread.
Buy 8 contracts of OEX November 470 puts @ 10.60
Sell 8 contracts of OEX September 470 puts @ 2.20
Total debit of $8.40.  As the market retreats, we will sell near
term puts against the November long 470 puts to further lower our
cost basis.  This position may take a few months to come to

In addition to reasonable trades with decent profit potential,
these two replacement trades will be good learning experiences as

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

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

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


Where is the Dow Going?
By Steve Gould

A while back I was watching one of those old swashbuckling pirate
movies.  In one of the scenes the ship was recuperating from a
storm.  After all the repairs were made the captain wanted to set
sail again.  He started giving out order after order.  He wanted
to raise the main sail, but before he did, he needed to have
something else in place.  Apparently timing was a critical issue
so he gave the famous order, "Stand by to hoist the main sail."  A
few moments later, when everything was in place he gave the final
order to hoist the main sail.

I would like to give the market the order, "Stand by to reverse
direction" but I think that is just a bit premature.  Instead I am
going to give the order, "Stand by to stand by."

I know in the past I have dogmatically stated that the market was
about to tank. I have since learned my lesson and I am going to
moderate here a bit.  I will not say categorically that the market
is going to tank because that is yet to be seen.  What I will
state though is that we are approaching a major pivot point and
after that point the market will take a severe reversal of course.
(OK, I have been listening to too much of Ah-nold's political

Let's take a look at some charts.

Chart: S&P 500 Weekly 8/22/2003

The weekly chart shows that the S&P 500 has been in a steady
decline since January 2000 tracing out a very clear five wave
basic pattern.  Currently the S&P 500 is putting the finishing
touches on the C wave of the 4 (green square) wave retracement.
The correction pattern of the 4 wave looks to be an expanded flat.
The characteristics of an expanded flat are

1. The A-B-C waves segment into a 3 wave, a 3 wave and a 5 wave.

So far the A wave is a 3 wave, the B wave is a 3 wave and the C
wave is an incomplete 5 wave.

2. The A wave and B wave are the same height (plus/minus 25%).

Right now the B wave is 90% of the A wave.

3. The C wave is somewhere between 1.38 to 1.62 times the height
of the A wave.

Currently the C wave is only 1.20 times the height of the A wave.

The minimum retracement level of a 4 wave is 23.6%.  A more
typical retracement level is at least 38.2%.  The S&P 500 has
pierced the 23.6% retracement level and I believe it is on its way
to the 38.2% level.  The oscillator is losing momentum as it
appears to be turning however if the S&P 500 does hit the 38.2%
retracement level, it will rise a bit to the 138% level.

Chart:  S&P 500 Daily 8/22/2003

The daily S&P 500 chart shows that the C wave is indeed very near
completion.  The S&P 500 has retraced the minimum 23.6% in an
apparent zigzag pattern.  I did not think the S&P 500 would
retrace so little and it may still retrace more should this turn
out to be a head fake.  But for now, with all the other indicators
pointing to a higher high, I am going to go with the shallower
retracement level.  The oscillator has retraced about 95% and has
reversed course.  This is the typical pattern seen for the 5 wave
and should culminate in the divergence contour necessary for the
completed five wave basic pattern.  Since the weekly wave 4 is
turning out to be an expanded flat, the C wave needs to trace out
a length that is 1.38 – 1.62 times the height of the A wave.  This
would put the completed 5 wave at the 1046 – 1090 level.  As it
turns out, the MOB (Make or Break) level is also at 1046 and will
add that much more to that resistance level.  The 38.2%
retracement level on the weekly falls at 1060.

A closer look at the hourly chart will shed some additional light
as to the anticipated behavior of the S&P 500 over the next week.

Chart:  S&P 500 Hourly 8/22/2003

The S&P 500 hourly chart shows that Friday's decline should be the
A wave of the 4 wave retracement.  I really do not think that this
is the full extent of the retracement because no clear A-B-C
corrective pattern can be seen.  I suspect that on Monday or
Tuesday we will see a small rally followed by a small anti-rally
and then the final surge as the S&P 500 climbs its way up to the
1046 - 1090 level.

Bottom line it appears that the S&P 500 is very near a top.  It
will probably complete the five wave basic pattern over the next
week or so.  Then sometime in September, the S&P 500, along with
the Dow and the NASDAQ will reverse course.  Just how far down
they go is a subject for another day.  For now, let's concentrate
on the upcoming pivot point.


Elliott Wave Plays
By Steve Gould

Boeing – BA – close: 35.68 change: +0.74

Company Description:

The Boeing Company (BA) operates in four principal segments:
Commercial Airplanes, Military Aircraft and Missile Systems, Space
and Communications and Boeing Capital Corporation. Commercial
Airplanes operations principally involve development, production
and marketing of commercial jet aircraft and providing related
support services. Military Aircraft and Missile Systems operations
principally involve research, development, production,
modification and support of military aircraft, both land-based and
aircraft-carrier-based, as well as helicopters and missiles. Space
and Communications operations principally involve research,
development, production, modification and support of space
systems, missile defense systems, satellites and satellite
launching vehicles, rocket engines and information and battle
management systems. Boeing Capital Corporation is primarily
engaged in the financing of commercial and private aircraft and
commercial equipment.

Why We Like It:

Boeing has been in a 5 wave basic pattern up since March 12, 2003.
Based on the wave 3 count (offered by the program) and the
oscillator, the wave 3 looks just about complete.  Also, the pink
and aqua bar represents a resistance level from the previous 4
wave.  BA is currently up against this resistance level.  The
interpretation of this bar is that BA is either going to reverse
trend and start the 4 wave down or it is going to bust through it
and continue higher.  This is an important pivotal point for BA
and a strategic spot to place a non-directional play.

Chart: Daily

The weekly chart shows BA in a 5 wave basic pattern down.  BA is
currently in a wave 4 correction.  The wave 4 looks like it could
be complete based on the following factors:

1. The oscillator has retraced about 125%
2. Wave 4 has retraced about 62% of wave 3
3. Wave 4 has segmented into an A-B-C corrective pattern.
4. Wave 4 is about the level of the previous wave 4

Additional evidence to support a top:

5. The stochastics are overbought and trending down
6. The ADX line is at 47 and has only been this high at major
pivot points.

Chart: Weekly

Trade Setup

On the weekly graph, BA should reach 19 by the end of the year.
On the daily graph, the Fibonacci retracements for the 4 wave
range from 32.50 (38%) to 29.60 (62%).  BA could then head higher
to 42-47 before ultimately heading down to 19.  I have devised a
play to take advantage of either move.  As long as BA moves 4-5
points either way (although there is a bullish bias), this play
will make money with very little risk.

I am anticipating BA to make a move down to complete the wave 4
(daily) and then a move up to finish the wave 5 (daily) and then
ultimately down to 19.  This play takes advantage of this move,
but works even if we are wrong.


The original option values on 6/17/2003 were

BA – 36.15

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Sell  1     BAGF   Jul 03 30    Call  6.10  6.40   -99.5   29
Buy   2     BAAU   Jan 04 37.5  Call  2.70  2.85    52.6   25

Credit: 0.40

Current values on 7/25/2003 are
(Buy back the Aug 30 Call)

BA – 32.68

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Sell  1     BAHF   Aug 03 30    Call  2.75  2.85   -95     21
Buy   2     BAAU   Jan 04 37.5  Call  0.75  0.80    26     22

Current values on 8/22/2003 are

BA – 35.68

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   2     BAAU   Jan 04 37.5  Call  1.60  1.65    44     22

Liquidation value: -2.85 + .40 + 3.20 = 0.75

Chart: BA update 8/22/2003

BA is due for a bit of a retracement but should continue up over
the next several weeks.  When the options reach $2.45, sell 1/2
the position.  This will make this a risk free trade as we have
recouped our initial investment.

Picked on June 17 at $36.15
Change since picked:    -0.47
Earnings Date        07/23/03 (confirmed)
Average Daily Volume:    6.42 million


NASDAQ-100 Index – QQQ – close: 32.44 change: -0.20

Company Description:

The NASDAQ-100 Index is a modified capitalization-weighted index,
which is designed to limit domination of the Index by a few large
stocks while generally retaining the capitalization ranking of

Representing 100 of the largest non-financial U.S. and non-U.S.
companies listed on the National Market tier of The NASDAQ Stock
Market, the NASDAQ-100 Index reflects NASDAQ's largest companies
across major industry groups, including computer hardware and
software, telecommunications, retail/wholesale trade and

Through an investment in the NASDAQ-100 Index Tracking Stock, QQQ,
investors can participate in the collective performance of many of
the NASDAQ stocks.

Why We Like It

Based on the analysis in "Where is the Dow Going?" for 6/13/2003
we want to play a put but hedge our bets.  The NASDAQ mirrors the
Dow, although sometimes it is a little out of sync.  The NASDAQ
(as well as the Dow) appears to be at a crucial junction where it
is going to make a move either up or down (versus remain flat). We
need some type of play that will make money whether the NASDAQ
moves up or moves down.

Trade Setup

This is going to be a non-directional play in the sense that we do
not care (really) which way the QQQs move, just as long as they
move.  It is slanted more toward a move down, but the spread will
protect us should we be totally wrong and the QQQs move up

Even though we have a July expiration date, this is not a 5 week
play.  We have until December for the QQQs to make their move, a
very likely event.  We are only selling the July put as protection
against being wrong.  Although we will need a larger move to make
a profit, we will risk substantially less should our direction be


The original option values on 6/13/2003 were

QQQ – 29.96

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   2    KLFME   Jan 04 31    Put   3.00  3.20   -0.44   32
Sell  1    QQQSK   Jul 03 37    Put   6.90  7.10    0.99   41

Credit: .50

Current values on 8/22/2003 are

QQQ – 32.44

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   2    KLFME   Jan 04 31    Put   1.60  1.65   -0.32   32
Sell  1    QQQSK   Sep 03 37    Put   4.50  4.70    0.90   34

Liquidation 1:  -1.50 + .50 =  -1.00

Chart: QQQ update 8/22/2003

The QQQs will follow the S&P 500 and Dow.  It will fall to about
the $31.76 level as it completes the 4 wave.  It will then rise to
about $34 before it reaches its pivot point.  At that time it will
reverse course.  If you have not already bought back the September
put, when it reaches $34 will be an ideal time.

Picked on June 13 at $29.96
Change since picked:     2.46
Earnings Date            n/a
Average Daily Volume:    93.0 million

AT&T – T – close: 21.73 change: 0.70

Company Description:

AT&T Corp. (T) is engaged in providing voice and data
communications services to large and small businesses, consumers
and government entities. AT&T and its subsidiaries furnish
domestic and international long distance, regional, local and
Internet communications services. The Company's primary lines of
business are AT&T Business Services and AT&T Consumer Services.
AT&T Business Services offers a variety of global communications
services to over four million customers, including large domestic
and multinational businesses, small and medium-sized businesses
and government agencies. AT&T Consumer Services is a provider of
domestic and international long distance and transaction-based
communications services to residential consumers in the United

Why We Like It:

T has been in a 5 wave basic pattern down since December 2002.  T
is now undergoing a wave 4 correction that looks to be complete
based on the following criteria:

1. Wave 4 has retraced about 60% of wave 3
2. The oscillator has retraced 138% but has not exceeded it.
3. Wave 4 has traced out an A-B-C correction pattern.  This
pattern appears to be a zigzag.
4. Wave C has completed a 5 wave basic pattern. (i – v)
5. The time frame of wave 4 falls within 1.38 – 1.62 of wave 3.
Combining the price retracement with the time frame puts the peak
of the 4 wave right in the middle of the black square.
6. The PTI is at 46.  Anything higher than 35 signals a new low
below the 3 wave.

T appears to have started the first leg down and has completed
wave 1.  T should now retrace around 50% to 20.80.  This will be
our entry point.

Chart: T Daily 6/23/2003

The hourly chart of T shows that the 5 wave basic pattern of the
first wave should be complete.  Look for a retracement level to
the level of the last 4 wave at 20.80.

Chart: T Hourly 6/23/2003

The weekly chart of T shows that it has already completed a 5 wave
basic pattern.  If that is indeed the case, then it will next
undergo an A-B-C corrective pattern.  This could very easily be
the A wave up and T is ready for the B wave retracement.  Note how
the A wave has bounced off the 55 period moving average.

Chart: T Weekly 6/23/2003

Trade Setup

We are going to play T to go down by using a bear call spread
(sort of).

The first target is the bottom of the 3 wave at 13.81 but T could
go as low as 12.19 by November.


T: $19.83

Pos  Num  Sym  Strike   Type   Bid   Ask   Delta   Vol   OI
Sell  1   TGC  Jul 15   Call  4.70  5.00   99.6     2   3695
Buy   2   TJX  Oct 22.5 Call  0.90  1.00   36.0    38   9684

Credit: $270

Wait for T to retrace to about 20.83.  If it appears to be headed
higher, do not be in a hurry to purchase the options.  See how
high it goes.  If it pierces the current wave 4 peak at 21.84, the
4 wave may not be done yet.  If it turns around before the 50%
retracement of 20.80, we may want to reevaluate which options to
purchase as the deltas and volatility will change.  We will have
to do a risk analysis on the July 17.50 call and October 25 calls.
That may be a better play at that point.


T: $20.00 (entry)

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Sell  1     TIC    Sep 03 15    Call  5.00  5.30   100     21
Buy   3     TJX    Oct 03 22.5  Call  0.50  0.65    31     22

Credit: $305

T: $21.73

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Sell  1     TIC    Sep 03 15    Call  6.60  6.90   -99     60
Buy   3     TJX    Oct 03 22.5  Call  0.75  0.85    43     30

Liquidation:  -3.85 + 2.25 = -1.60

Chart: T update 8/22/2003

I think that T has head faked me and is now on its way up.
Fortunately, this play can make money either way.  T will finish
up the 5 wave and then retrace to the $18 level.  At that point,
buy back the September option.  We may run out of time so we will
keep a close watch on this one.

Picked on June 23 at $20.00
Change since picked:     1.73
Earnings Date        07/24/03 (confirmed)
Average Daily Volume:    5.21 million


Wendy's – WEN – close: 29.18 change: +0.05

Company Description:

Wendy's International Inc. is primarily engaged in the business of
operating, developing and franchising a system of distinctive
quick-service and fast-casual restaurants. The Company has 6,253
Wendy's restaurants in operation in the United States and in 21
other countries and territories. The Company and its franchisees
also operates 2,348 Tim Hortons restaurants and 210 Baja Fresh

Why We Like It:

We are basing our play on the weekly chart and confirming it with
the daily.  Because it is weekly, it will take a little bit longer
to play out.  Let's examine the weekly chart first.

The weekly chart shows WEN in a classic Type II set up based on
the following criteria:

1. Wave 4 has retraced almost 50%.
2. The oscillator has retraced about 120% and has turned.
3. The wave 4 peaked between 138 – 162% of wave 3 in terms of
4. Wave 4 subdivides into an A-B-C correction pattern. Although
the subdivisions are not as "ideal" as I would like to see it,
they are clearer on the daily pattern.
5. WEN has broken through the red auto trend line.
6. The PTI is greater than 35.
7. This pattern has the "look" of a very well behaved Elliott

Chart: WEN Weekly 7-22-2003

The daily chart shows that WEN is in the midst of a five wave
basic pattern down, consistent with the weekly chart.  Right now
WEN is in the middle of the 3 wave which can be the most intense
of the 5 waves.  The five wave basic pattern starting in March
could very easily be interpreted as an A-B-C correction pattern,
thus satisfying the look of a 4 wave on the weekly.

Chart: WEN Daily 7-22-2003

Trade Setup

Based on the weekly chart, WEN should hit 21 by the beginning of
the year.  That gives us about a 6 month time frame.  We are going
to make this a straight directional play within that timeframe.
The March 2004 puts would be the options of choice, but those
options show no open interest nor volume.  Therefore we will use
the January option and carefully watch the time decay.

The 25 put has a delta of -21 which is a little lower than I would
like to see, the ideal being 25 - 30.  The next available option
is the 30 put but that has a delta of 48.  I believe the 25 put is
the better play because we could buy three 25 puts for the cost of
one 30 and have a delta of 63 versus 48.

The volatility of WEN is as low as it has been in the last year.
As WEN goes lower, the volatility should increase, thus making the
play even more profitable.

WEN – 28.84 as of 7/22/2003

Sym   Strike   Type   Bid    Ask   Delta   Vol   OI
WENME   25     Put   0.85   0.95   -21.2    0   771
WENMF   30     Put   2.75   2.95   -48.7    0   555

Current values on 8/15/2003 are

WEN – 28.52

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   10    WENME   Jan 04 25   Put  0.50  0.70    -14     32

Chart: WEN update 8/22/2003

On the weekly chart WEN is still on target to $21.  WEN hit the
stop loss while I was on vacation so I wasn't able to update it.
Right now WEN is overbought and should decline a bit.  At that
time, we can reevaluate the position so see if we should close
them out.

Picked on July 22 at $28.84
Change since picked:    -0.34
Earnings Date        07/24/03 (confirmed)
Average Daily Volume:    0.652 million


Take Two - TTWO – close: 27.39 change: -0.18

Company Description:

Take-Two Interactive Software Inc. (TTWO) is an integrated global
developer, marketer, distributor and publisher of interactive
entertainment software games and accessories for the PC,
PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo
GameCube, Nintendo Game Boy Advance and the Xbox. The Company
publishes and develops products through various wholly owned
subsidiaries including Rockstar Games, Rockstar Studios,
Gathering, Joytech, PopTop, Global Star and under the Take-Two
brand name. The Company maintains sales and marketing offices in
Cincinnati, New York, Toronto, London, Paris, Munich, Vienna,
Copenhagen, Milan, Sydney and Auckland.

Why We Like It:

TTWO has been in a five wave basic pattern incline since March.
Currently TTWO is undergoing the 4 wave retracement and has yet to
complete it.  TTWO should complete the 4 wave retracement in a few
days when it hits 25 at which point the target will be 34.

The Type I setup meets the following criteria:

1. The 4 wave has already retraced about 58% and should retrace
about 63% when the 4 wave is complete.

2. The 4 wave segments nicely into a zigzag.

3. The oscillator has peaked at the zenith of the 3 wave and has
retraced about 150%.

Chart: Daily

The weekly chart of TTWO shows that TTWO has just finished a five
wave basic pattern that completed at the end of 2002.  TTWO could
be in the midst of an A-B-C correction or it could be completing
the five wave basic pattern.  The oscillator is ambiguous at this
point.  This pattern is very similar to the one for the 5 wave of
the last five wave basic pattern.  If that is the case, then the
oscillator is going a bit lower as the 4 wave completes and then
rise again being almost an exact duplication of the previous five
wave basic pattern.

Chart: Weekly

The hourly chart of TTWO shows TTWO to be in the process of a 4
wave retracement of the daily C wave.  It is not entirely clear as
to whether TTWO will first rise to about 28.60 first or head
straight down to 25.  In either case, we are going to wait for 25
as an entry point which should occur sometime late in the day on

Chart Hourly

Trade Setup

TTWO should reach 34 by October.  The December options should give
us plenty of time to complete the trade.  When TTWO hits 25, the
Ask should be about 1.35.


The original option values on 8/4/2003 were

TTWO – 25.00

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   10    TUOLF  Dec 03 30    Call  1.20  1.35    31     45

Current values on 8/22/2003 are

TTWO – 27.39

Pos   Qty   Sym     Strike      Type  Bid   Ask    Delta   IV
Buy   10    TUOLF  Dec 03 30    Call  1.70  1.85    42     42

Chart: TTWO update 8/22/2003

TTWO is in the midst of a 4 wave correction on the hourly chart.
TTWO will retrace a bit and then track higher as it completes the
hourly 5 wave.  At that point we will take partial profits.

Picked on August 5 at $25.00
Change since picked:     2.39
Average Daily Volume:    1.17 million


Readers Write: This week's questions concern the use of index
options as a hedging tool for bullish portfolios.

Attn: questions@OptionInvestor.com
Subject: Insurance Through Index Options


As many investors, I am always concerned about the next big event
that will spur a sell off in the markets as did the 9/11 attack.
I have been reading several articles concerning the purchase of
puts on various indexes as insurance against a major decline in
the market. I have a few questions; assume that the majority of
my stocks are on the nasdaq, so I would use the ndx or qqq as the
index. My naked positions never exceed a 3 month expiration and
my portfolio exposure is $200,000 with a 50% margin ($100,000 in
cash). My puts are written 20% out of the money.

My questions are:

What strike price and expiration date would I purchase the puts?

How many ndx or qqq puts would I need to purchase?

Is this a viable strategy and at what cost?

Thank you,


Hello MB,

Your questions were:

What strike price and expiration date would I purchase the puts?

I think this would depend on how much "Fire Insurance" you want
to purchase.  If you buy the shorter-term options, they will be
cheaper, but the time-value premium will evaporate much quicker.
The longer-term options will be more expensive, but if nothing
happens, they will maintain their time value much longer.  The
strike prices that you choose will determine your "Deductible."
The closer to the money the options are, the more expensive they
become, and yet the more the options will appreciate if the market
turns lower.  Further out of the money options are cheap, however
they also increase the deductible, or the price at which your
portfolio is insured.  In short, there is no right answer to this
question.  You need to be comfortable with the risk outlook in
your portfolio and realize that this is insurance.  If you cannot
collect, you should not be upset.

Again, I equate this to fire insurance on your home.  You do not
purchase insurance hoping that the house burns to the ground, but
rather only to make-up the loss sustained if this terrible event

How many ndx or qqq puts would I need to purchase?

This question is difficult to answer as it would really depend on
your outlook for the market and how much insurance you wish to
purchase.  With the QQQs trading @ 32, ten options with a strike
price of 32 would control $32k of the underlying issue.  If you
want $200,000 of insurance, you would need to purchase about 60
options.  If this sounds like too much premium, you might consider
selling some calls to help pay for the insurance.  A trader can
lower the cost of buying puts by a significant amount through the
use of this technique, as long as he considers the additional risk
and manages it appropriately.

Is this a viable strategy and at what cost?

I believe that the strategy is viable if you view it strictly as
"Fire Insurance."  The puts will help protect your portfolio if it
consists of mostly NASDAQ stocks.  Similar hedge positions could
be constructed for Dow or S&P type portfolios.  The above example
(buying 60 QQQ JAN-$32 puts) would cost $12,600.  This purchase
would offset any downside potential in the NASDAQ until the middle
of January.  If you were to sell the JAN-$35 calls to hedge, you
would receive $7200 in premium with a net cost of about $5400.  If
the QQQs do not rally more than 10%, the call options will expire
worthless.  Selling the calls is not always the best strategy, but
the technique can help to reduce the cost of your insurance in
favorable market conditions.

I would welcome the opportunity to speak to you about how we work
with our clients to help the develop good trading techniques.  I am
available during market hours.  Please feel free to contact me at:
(888) 281-9569.

Thank you,

Andrew Aronson

V.P. Investments
Division of Man Financial
141 W. Jackson Blvd Ste 1800-A
Chicago, IL 60604

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The Option Investor Newsletter                   Sunday 08-24-2003
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Trading Basics: Covered-Call Basics
Naked Puts: Options 101: Why Focus On Technicals?
Spreads/Straddles/Combos: Friday's Retreat Warrants Concern!

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Trading Basics: Covered-Call Basics
By Mark Wnetrzak

One of our new readers asked about the formula for determining
potential profit in covered-call positions.  Fortunately, there
is a free calculator for this strategy (and others) available on
the OIN web-site.

Attn: Covered-Calls Editor
Subject: Option Trading Calculator

Hi Mark,

I am new (trial) reader so please pardon the basic questions. In
your covered-call candidates from 8-17, you listed a play on RF
Micro (RFMD) with a cost of $8.07 on the stock and the Sep-7.50
call at $0.90. This leaves a cost basis of $7.17 for the stock.
Since the maximum amount of profit I can earn is $0.33, how does
that equate to a yield of 4%?  My math says it's nearer to 5%
(about 10% on margin) without commissions, and though that's not
a big difference, I assume it could be a larger error on higher
priced stocks.  Please explain how you arrived at that number.



Regarding the potential yield for covered-calls:

The target-yield or return on investment for covered calls is
determined by two circumstances: Return if Called (RC), and
return not called (RNC).  Most traders use the RNC to evaluate
plays since there is no assumption made on the movement of the
underlying equity.  To calculate the return, you take the net
premium received and divide it by the cost basis.  The cost
basis would be the price paid for the stock, minus the premium
received; this is the maximum amount of equity required for the
duration of the play (not using margin).  In the covered-call
section, we use generally accepted formulas to calculate the
return as shown below.

For an in-the-money (ITM) covered call, the net premium would
be the option premium received, minus the difference between
the cost of the stock and the strike price.  So, ITM RNC will
be the same as RC since the sold strike is "in-the-money," and
it is the maximum return possible.

ITM example:

ABC stock @ $12.00, strike = $10.00, option premium = $2.50
Net premium = 2.50 - (12 - 10) = 0.50
Cost basis = 12.00 - 2.50 = 9.50
RC = 0.50/9.50 = 5.26% after multiplying by 100
RNC = the same

For an out-of-the-money (OTM) covered call, the premium for a
RC calculation would be the option premium, plus the difference
between the cost of the stock and the strike price, and assumes
the stock price will move up to the sold strike!  An OTM RNC
calculation uses only the option premium and assumes the stock
price remains unchanged.

OTM example:

XYZ @ $12.00, strike = $12.50, option premium = $1.00
Potential premium = 1.00 + (12.50-12) = 1.50
Cost basis = 12.00 - 1.00 = 11.00
RC = 1.50 / 11.00 = 13.64%
RNC = 1.00 / 11.00 = 9.09%  (Remember, you do not get the benefit
of the stock price moving up to the strike price).

All of the candidates in the Covered Calls section are ITM as
the goal is to obtain the highest probability of making an
acceptable (and consistent) return.  Therefore, I calculate a
"monthly based" Target Yield.  Using the ITM example above
of 5.26% and say an expiration of 3 weeks (21 days), I would
calculate the target yield (TY) as follows:

TY = 5.26 / 21 * 365 / 12 = 7.61%.

Essentially the return is annualized and divided by 12.  This
helps to visualize the value of compounding a seemingly small
return over and over again.  Also note that I don't include the
cost of commissions as they can vary greatly depending on which
brokerage is used.  Generally, the newsletter recommendations
would require a purchase of 500 - 1000 shares in order to limit
the impact of commissions.  On a 1000 share order, the cost of
commissions at E*trade (2 stock and 1 option) would be about
$78.00, or $0.08 a share.  Two stock options would be required
because it is assumed the stock will be "called" away and thus
a commission incurred for "selling" the stock.

You can download a free option-trading calculator at this link:


The spreadsheet is really nothing special (requires MSExcel-95
or higher) but it works well for common stock-option strategies.
There is a brief explanation at the bottom of the screen for
each column and there are six strategy tabs to choose from for
various option trading techniques.


Mark W.


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Note:  Margin not used in calculations.

Stock   Price   Last    Option    Price   Gain  Potential
Symbol  Picked  Price   Series    Sold   /Loss  Mon. Yield

WAVX     3.46    2.92  SEP  2.50  1.20    0.24*   7.7%
XOMA     8.09    9.45  SEP  7.50  1.30    0.71*   7.6%
ENER    10.39   11.85  SEP 10.00  1.10    0.71*   6.6%
NWAC     8.30    9.10  SEP  7.50  1.40    0.60*   6.3%
EPNY     5.07    5.05  SEP  5.00  0.40    0.33*   6.1%
NEOF    12.45   13.10  SEP 12.50  0.90    0.95*   6.0%
WAVX     3.20    2.92  SEP  2.50  0.85    0.15*   5.5%
USG     14.11   15.53  SEP 12.50  2.35    0.74*   4.6%
VSAT    15.09   15.52  SEP 15.00  0.80    0.71*   4.3%
TKLC    15.46   15.20  SEP 15.00  1.15    0.69*   4.2%
ISIS     5.33    5.84  SEP  5.00  0.60    0.27*   4.1%
RFMD     8.07    8.75  SEP  7.50  0.90    0.33*   4.0%
SNIC    11.18   12.20  SEP 10.00  1.70    0.52*   4.0%
GSIC    11.52   12.03  SEP 10.00  1.95    0.43*   3.9%

*   Stock price is above the sold striking price.


What goes up must come down; but does it have to happen on Friday?
The reversal into the red on Friday is a bit worrisome and could
be a sign of exhaustion -- mayby both sides -- bulls and bears.
The model covered-call portfolio has benefited from the bullishness
earlier in the week though next week could be a different story.

Positions Previously Closed: None


Sequenced by Target Yield (monthly basis)
Stock   Last   Option    Option  Last  Open  Cost  Days Target
Symbol Price   Series    Symbol  Bid   Int.  Basis Exp. Yield

PLXT    5.25  SEP  5.00  PIU IA  0.60  20     4.65  28   8.2%
MCDTA  12.66  SEP 12.50  MQG IV  1.00  687   11.66  28   7.8%
PLUG    5.13  SEP  5.00  PQL IA  0.45  1382   4.68  28   7.4%
MCRL   12.60  SEP 12.50  MIQ IV  0.65  43    11.95  28   5.0%
XOMA    9.45  SEP  7.50  MBU IU  2.25  1053   7.20  28   4.5%
ADLR   13.96  SEP 12.50  UAH IV  1.90  192   12.06  28   4.0%
CREE   16.30  SEP 15.00  CVO IC  1.75  5294  14.55  28   3.4%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

PLXT - PLX  $5.25  *** Cheap Speculation ***

PLX Technology (NASDAQ:PLXT) develops and supplies semiconductor
devices that accelerate and manage the transfer of data in
networking and telecommunications, enterprise storage, servers,
PCs, imaging and industrial equipment.  The company offers a
complete solution consisting of 3 related types of products:
semiconductor devices, software development kits and hardware
design kits.  The company's semiconductor devices simplify the
development of data transfer circuits in high-performance
embedded systems and computers and are compatible with
microprocessors such as Motorola's PowerPC, Intel's i960 and
StrongArm, Broadcom's MIPS, PMC-Sierra's MIPS and digital signal
processors from such companies as Texas Instruments.  PLX has
been in a basing formation since last July and this position
offers an excellent reward potential at the risk of owning this
issue at a reasonable cost basis.

SEP-5.00 PIU IA LB=0.60 OI=20 CB=4.65 DE=28 TY=8.2%

MCDTA - McData $12.66  *** Earnings On Monday ***

McData (NASDAQ:MCDTA) is a provider of open storage networking
solutions and provides highly available, scalable and centrally
managed SANs that address enterprise-wide storage problems.  The
company's core-to-edge enterprise solutions consist of hardware
products, software products and professional services.  McDATA's
SAN solutions improve the network reliability and availability
of data, simplify the management of SANs and reduce the total
cost of ownership.  The company combines experience in designing,
developing and manufacturing SAN solutions with knowledge of
business-critical applications, service and support to solve
complex business problems facing data infrastructures.  Its
solutions enable businesses to scale their operations globally
through a comprehensive, manageable, flexible infrastructure
that is optimized for rapid deployment and responsiveness to
customer needs.  With earnings due after the close on Monday,
this position offers traders who are bullish on the company's
future, a chance to target shoot an entry point close to support.

SEP-12.50 MQG IV LB=1.00 OI=687 CB=11.66 DE=28 TY=7.8%

PLUG - Plug Power   $5.13  *** Alternate Power Play ***

Plug Power (NASDAQ:PLUG) designs, develops and manufactures on-
site electric power generation systems utilizing proton exchange
membrane (PEM) fuel cells for stationary applications.  Plug's
initial product is a fully integrated, grid parallel 5-kilowatt
fuel cell system that operates on natural gas.  This initial
product is intended to offer quality power while demonstrating
the market value of fuel cells as a preferred form of alternative
distributed power generation.  The company's R&D facility contains
over 150 test stations where its conduct design optimization and
verification testing, rapid-aging testing, failure mode and
effects analysis, multiple technology evaluations, and endurance
testing in the company's effort to accelerate the development and
commercialization of its fuel cell systems.  Shares of several
fuel cell developers rallied after this country's historical
blackout last week.  Plug Power has been forging a Stage I base
near $5 for a year and traders can use the inflated premiums to
establish a bullish, relatively low-risk position in the issue.

SEP-5.00 PQL IA LB=0.45 OI=1382 CB=4.68 DE=28 TY=7.4%

MCRL - Micrel  $12.60  *** Intel Rally ***

Micrel (NASDAQ:MCRL) designs, develops, manufactures and markets
a range of analog power integrated circuits and mixed-signal and
digital integrated circuits.  Micrel ships over 1,700 standard
products and derived the majority of its product revenue for 2002
from sales of standard analog and high-speed communications ICs.
These products serve various end markets, including cellular
handsets, portable computing, enterprise and home networking,
wide area and metropolitan area networks and industrial equipment.
In addition, the company manufactures custom analog and mixed-
signal circuits and provides wafer foundry services for customers
that produce electronic systems for communications, consumer and
military applications.  Micrel has been in a trading range since
last November with near-term support around $11.  The company's
shares spiked on Friday after Intel's (NASDAQ:INTC) raised
outlook inspired the semiconductor sector.  With a pullback
towards support likely, investors who believe the recovery is
on hand can use this position to target shoot an entry point
in Micrel.

SEP-12.50 MIQ IV LB=0.65 OI=43 CB=11.95 DE=28 TY=5.0%

XOMA - XOMA  $9.45  *** New Drug Speculation ***

XOMA (NASDAQ:XOMA) is a biopharmaceutical company that develops
and manufactures products to treat cancer, immunologic and
inflammatory disorders and infectious diseases.  The company's
products are in various stages of development and all are
subject to regulatory approval before it or its collaborators
can commercially introduce any products.  In addition, XOMA has
proprietary technologies relating to recombinant antibodies and
proteins, including bacterial cell expression systems and the
Human Engineering method for creating human-like antibodies,
both of which are available for licensing.  XOMA also uses these
technologies in developing its own products.  XOMA rallied sharply
after New data showed that Genentech's (NYSE:DNA) experimental
psoriasis drug Raptiva works better over the long term.  The FDA's
dermatologic and opthalmic drugs advisory committee will review on
Sept. 9 Genentech and partner Xoma's biologics license application
for Raptiva.  Investors who expect good news can speculate on that
outcome with this position.

SEP-7.50 MBU IU LB=2.25 OI=1053 CB=7.20 DE=28 TY=4.5%

ADLR - Adolor  $13.96  *** Trading Range ***

Adolor (NASDAQ:ADLR) is a development stage biopharmaceutical
corporation that discovers, develops and plans to commercialize
proprietary pharmaceutical products for the treatment of pain
and the side effects that are caused by pain treatments.  The
company has a number of small molecule product candidates that
are in various stages of development ranging from preclinical
studies to Phase III clinical trials.  Adolor's lead product
candidate, alvimopan, is designed to selectively block the
unwanted effects of opioid analgesics on the gastrointestinal
tract.  The company's other product candidates are being designed
as analgesics to treat moderate-to-severe pain and itch.  Adolor
is also exploring the development of an analgesic candidate that
would be intended to produce the pain relief of an opioid while
reducing side effects, such as constipation, nausea and vomiting.
Adolor has been trading around $12 for almost two years and this
position offers investors who believe the trend will continue a
method to profit from that outcome.

SEP-12.50 UAH IV LB=1.90 OI=192 CB=12.06 DE=28 TY=4.0%

CREE - Cree  $16.30  *** Near Historical Support ***

Cree (NASDAQ:CREE) is engaged in the development and manufacture
of compound semiconductor materials and electronic devices made
from silicon carbide (SiC), and a developer and manufacturer of
optoelectronic and electronic devices made from gallium nitride
(GaN) and related materials.  The company also produces radio
frequency (RF) power transistor components and modules for
wireless infrastructure applications using silicon-based bipolar
and laterally diffused metal oxide semiconductor (LDMOS) process
technologies.  Cree operates its business in two segments, the
Cree segment, which consists of its SiC-based products and
research contracts; and the Cree Microwave segment, which
consists of RF transistors and RF transistor modules based on
a silicon platform.  Cree has been hampered recently by lawsuit
issues and a SEC investigation but has recently rallied on no
news.  The current outlook is recovering and the recent bullish
activity supported by heavy volume is encouraging.  We simply
favor the long-term support area around $14 and traders can
speculate on the near-term performance of the issue with this

SEP-15.00 CVO IC LB=1.75 OI=5294 CB=14.55 DE=28 TY=3.4%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary.

Sequenced by Target Yield (monthly basis)
Stock   Last   Option    Option  Last  Open  Cost  Days Target
Symbol Price   Series    Symbol  Bid   Int.  Basis Exp. Yield

XING    7.71  SEP  7.50  QAE IU  0.70  877    7.01  28   7.6%
STEL    7.52  SEP  7.50  URU IU  0.45  215    7.07  28   6.6%
SEAC   10.01  SEP 10.00  UEG IB  0.55  89     9.46  28   6.2%
RSYS   17.70  SEP 17.50  MKU IW  1.15  137   16.55  28   6.2%
ACDO   24.01  SEP 22.50  DZU IX  2.45  293   21.56  28   4.7%
MENT   20.00  SEP 20.00  MGQ ID  0.80  102   19.20  28   4.5%
AMSC   11.60  SEP 10.00  QAY IB  2.00  349    9.60  28   4.5%
NEOF   13.10  SEP 12.50  QZX IV  1.05  32    12.05  28   4.1%
ASYT   13.40  SEP 12.50  QQY IV  1.35  479   12.05  28   4.1%
WFII   15.28  SEP 15.00  QUU IC  0.80  56    14.48  28   3.9%
SLNK   18.96  SEP 17.50  SXU IW  2.05  175   16.91  28   3.8%
RINO   12.89  SEP 12.50  AGQ IV  0.80  1469  12.09  28   3.7%
JNPR   15.48  SEP 15.00  JUX IC  0.95  8908  14.53  28   3.5%
HELX   17.92  SEP 17.50  HHQ IW  0.95  56    16.97  28   3.4%
BLDP   12.98  SEP 12.50  DUJ IV  0.85  670   12.13  28   3.3%
ODP    17.75  SEP 17.50  ODP IW  0.60  139   17.15  28   2.2%


Options 101: Why Focus On Technicals?
By Ray Cummins

One of the most common questions among new readers is, "Why don't
you concentrate more on a company's fundamentals when selecting
naked-put candidates?"

There are two basic approaches to analyzing stocks; technical and
fundamental.  The majority of older investors are more comfortable
with fundamental analysis.  That is the process where one attempts
to predict the future earnings of a corporation by analyzing their
market share, annual revenue, pricing structure, and similar data
regarding the operation of the company's business.  In contrast,
technical analysis, which is the study of historical stock price
trends and chart patterns, has nothing at all to do with the daily
operations of the company.  For this reason, it is often viewed as
less than adequate by well-known "value" investors such as Warren
Buffet and Benjamin Graham.  In truth, there is intrinsic merit in
both methods and each system can produce favorable results.

Many of our subscribers are surprised to learn that we do little
in the context of fundamental analysis when it comes to choosing
stocks for this section.  Of course, the most obvious reason for
our choice of analysis is the limited time available for research
prior to the publishing deadline.  However, there are also many
practical advantages to a "technicals-based" approach, not the
least of which is the fact that it removes the need to assess the
infinite number of components involved in fundamental valuation
that market analysts find so intriguing.  But more importantly,
trading strategies based on historical prices can provide very
precise entry and exit signals, which is a benefit to traders who
participate in short-term strategies such as buying and selling

Technical analysis makes three basic assumptions.  First, simple
market data such as price and volume indicate the true value of a
specific stock or financial issue.  Second, prices historically
exhibit trends or patterns and third, history eventually repeats
itself.  These assumptions can be combined with the study of price
and volume to provide traders the basic information they need to
initiate profitable trading strategies.  The technical indicators
that identify buy or sell signals are contained in various chart
formations and patterns and in many cases, no additional data is
needed.  Since the goal of any investor is to profit from their
predictions, many experts suggest that the best place to begin is
with proven practices such as evaluating an issue's price history
and primary trend.

For most investors, the easiest way to consistently make money in
the market is to form the correct outlook for its future movement
and position themselves to profit from that activity.  In fact,
that is the premise of the technician; that past price behavior
can be used to forecast future trends, thus providing a means to
profit from a successful forecast.  Numerous systems have been
developed to help traders form an opinion based on chart patterns
and predict future turning points and direction in the underlying
issue.  The process begins by identifying the strength and primary
direction of a trend.  The underlying basis for future predictions
is driven by the premise that once a trend is in motion, it will
continue in that direction until a change in character occurs.
Successful technical analysts will look at many indicators from
different perspectives and identify signals that forecast upcoming
changes or trend reversals.  When you can do this accurately, and
on a regular basis, your portfolio value will grow consistently,
regardless of the overall condition of the market.

Good Luck!


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Stock   Price   Last    Option    Price   Gain   Simple  Max
Symbol  Picked  Price   Series    Sold   /Loss   Yield  Yield

AMSC    13.20   11.60  SEP 10.00  0.70    0.70*   6.5%  18.2%
CBST    12.72   12.63  SEP 10.00  0.50    0.50*   4.6%  14.3%
RIMM    24.61   28.74  SEP 20.00  0.75    0.75*   2.8%   9.1%
OVTI    43.77   41.29  SEP 35.00  0.95    0.95*   2.4%   8.5%
THER    13.93   13.63  SEP 12.50  0.55    0.55*   3.3%   8.5%
BLUD    23.12   24.80  SEP 22.50  1.00    1.00*   3.4%   7.5%
SEPR    21.76   26.06  SEP 17.50  0.50    0.50*   2.1%   7.3%
TKLC    13.73   15.20  SEP 12.50  0.45    0.45*   2.7%   6.9%
PHTN    28.90   29.57  SEP 25.00  0.65    0.65*   2.3%   6.8%
JDAS    13.90   16.08  SEP 12.50  0.40    0.40*   2.4%   6.4%
UTEK    25.75   27.64  SEP 22.50  0.55    0.55*   2.2%   6.3%
SEPR    23.49   26.06  SEP 20.00  0.45    0.45*   2.0%   6.2%
PDII    24.25   24.88  SEP 20.00  0.50    0.50*   1.9%   6.1%
AEIS    21.02   23.09  SEP 17.50  0.30    0.30*   1.5%   5.0%

*  Stock price is above the sold striking price.


Investors sold for profits Friday, ending a week-long rally that
carried the major equity indices to 2003 highs.  The only good
thing about the sell-off was that it occurred on average volume,
suggesting there is little conviction in a major trend reversal.
That does not mean, however, that traders can be complacent with
existing bullish positions and we recommend continued diligence
in portfolio management.  Issues on the "watch" list include:
Therasense (NASDAQ:THER) and Cubist (NASDAQ:CBST).

Previously Closed Positions: None


The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.


The Initial Margin is the amount of collateral you must have in
your account to initiate the position.  In specific terms, margin
refers to cash or securities required of an option writer by his
brokerage firm as collateral for the writer's obligation to buy
or sell the underlying interest if assigned through an exercise.
The Maintenance Margin is the amount of cash (or securities)
required to offset the changing collateral requirements of the
written options in your portfolio.  As the price of the option
and the underlying stock changes, so does the maintenance margin.
With (short) put options, the margin requirements can increase
when the underlying stock price declines and also when it rises
significantly.  The reason is the manner in which the collateral
amount is determined (with the formula listed above) and traders
should always consider not only the initial margin requirement,
but also the maximum margin needed for the life of the position.
Option writers occasionally have to meet calls for additional
margin during adverse market movements and even when there is
enough equity in the account to avoid a margin call, the need
for increased collateral will make that equity unavailable for
other purposes.  Please consider these facts carefully before
you initiate any "naked" option positions.

For more information on margin requirements, please refer to:



The Maximum Monthly Yield (listed in the summary and with each
new candidate) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The Simple Monthly Yield is based on the cost of the underlying
issue (in the event of assignment), including the premium from
the sold option, thus it reflects the maximum potential loss in
the position.


Sequenced by Maximum Yield (monthly basis - margin)
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

TIVO   10.91  SEP 10.00  TUK UB 0.30 283   9.70  28   3.4%   8.7%
RIMM   28.74  SEP 25.00  RUL UE 0.60 4628 24.40  28   2.7%   7.8%
IDTI   13.10  SEP 12.50  ITQ UT 0.35 2432 12.15  28   3.1%   7.6%
NFLX   28.80  SEP 25.00  QNQ UE 0.55 3937 24.45  28   2.4%   7.2%
SRNA   18.77  SEP 17.50  NHU UW 0.40 177  17.10  28   2.5%   6.5%
BRCM   25.80  SEP 22.50  RCQ UX 0.35 9883 22.15  28   1.7%   5.2%
PHTN   29.57  SEP 25.00  PDU UE 0.35 315  24.65  28   1.5%   5.0%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without
margin), MY-Maximum Yield (monthly basis - using margin).

TIVO - TiVo  $10.91  *** Optimistic Growth Outlook! ***

Founded in 1997 with the mission to dramatically improve consumers'
television viewing experiences, TiVo (NASDAQ:TIVO) is a creator in
television services for digital video recorders.  TiVo's leadership
has defined and inspired the entire category, earning the company
patents for pioneering inventions associated with DVR software and
hardware design.  TiVo was the first to deliver on the promise of
consumer choice and control over TV viewing, building a loyal and
passionate subscriber base with over 97% of customers surveyed
recommending TiVo to a friend.  This enthusiasm has contributed to
overwhelming growth over the past year, and the total subscriber
base exceeds 700,000.  Shares of TIVO climbed to their highest level
in three weeks Friday after the company posted higher-than-expected
subscriber additions.  The company also upped its full-year revenue
forecast, due to anticipated stronger demand from subscribers of
DirecTV, the largest U.S. satellite service.  Traders can speculate
on the continued growth of TIVO's subscriber base (and its share
value) with this position.

SEP-10.00 TUK UB LB=0.30 OI=283 CB=9.70 DE=28 TY=3.4% MY=8.7%

RIMM - Research In Motion  $28.74  *** Another New High! ***

Research In Motion Limited (NASDAQ:RIMM) is a designer, builder,
and marketer of wireless solutions for the mobile communications
market.  Through development and integration of hardware, software
and services, the firm provides solutions for seamless access to
time-sensitive information and communications, including e-mail,
telephone, messaging and Internet- and intranet-based applications.
The company's technology also enables a broad array of third-party
developers and manufacturers around the world to enhance their own
products and services with wireless connectivity.  RIM's portfolio
of products includes a family of wireless handhelds, the BlackBerry
wireless e-mail solution, embedded radio modems and a suite of
software development tools.  Despite the recent legal woes, shares
of RIMM reached a new "all-time" high this week and the company's
lucrative niche in the wireless e-mail market will likely improve
its bottom line in the coming year.

SEP-25.00 RUL UE LB=0.60 OI=4628 CB=24.40 DE=28 TY=2.7% MY=7.8%

IDTI - Integrated Device Tech.  $13.10  *** Break-Out Coming? ***

IDT (NASDAQ:IDTI) is a leading provider of clock management and
logic solutions and has leveraged its core competencies to develop
a full array of products for the DIMM market.  In addition to the
new DDR2 RVB, IDT was the first company to introduce a complete
chip set of JEDEC-compliant DDR2 DIMM logic components.  The IDT
DDR2 chip set includes a register that drives the address signals
and supports 1:1 and 1:2 configurations, allowing designers to
work with a single device for multiple DIMM configurations.  The
chip set is also comprised of a 1:10 PLL clock driver used for
synchronization of clock signals from the system motherboard to
all SDRAMs on the DIMM.  The devices target registered DDR2 DIMMs
that address the memory needs of growing market areas such as
servers, workstations and communication devices.  IDTI emerged in
one of our technical scans as an issue with upside potential in
the near-term and traders who favor the outlook for the company
can speculate conservatively on its future share value with this

SEP-12.50 ITQ UT LB=0.35 OI=2432 CB=12.15 DE=28 TY=3.1% MY=7.6%

NFLX - Netflix  $28.80  *** New "All-Time" High! ***

Netflix (NASDAQ:NFLX) is an online entertainment service in the
United States that provides more than 600,000 subscribers access
to a comprehensive library of more than 11,500 movie, television
and other filmed entertainment titles.  The company's standard
subscription plan allows subscribers to have three titles out at
the same time with no due dates, late fees or shipping charges.
Subscribers can view as many titles as they want in a month and
they select these titles at the firm's Website (www.netflix.com)
aided by its proprietary CineMatch technology.  They receive them
on DVD by first-class mail and return them to the company at their
convenience using prepaid mailers.  Once a title has been returned,
Netflix mails the next available title in a subscriber's queue.
Shares of NFLX hit a new high this week and regardless of whether
the activity is due to a potential buy-out or the CEO's quest to
to become a billion-dollar company, the stock appears poised for
higher prices in the near future.

SEP-25.00 QNQ UE LB=0.55 OI=3937 CB=24.45 DE=28 TY=2.4% MY=7.2%

SRNA - Serena  $18.77  *** Recovery In Progress! ***

Serena Software (NASDAQ:SRNA) is the Enterprise Change Management
(ECM) industry leader.  For over twenty years Serena has focused
exclusively on providing application change management solutions
to the world's leading enterprises, and today its products are in
use at over 3,000 customer sites -- including 46 of the fortune 50.
Serena leads the way in ECM by providing a single point of control
to manage software code and Web content changes throughout the
enterprise, from the mainframe to the Web.  Serena is headquartered
in San Mateo, California and maintains international offices in
Canada, Germany, France, Benelux and the United Kingdom.  Serena
announced last week that its second-quarter profit fell as costs
rose, with total revenues up 8% over the second quarter of fiscal
2003.  The news was followed by a slew of upgrades and the issue
appears destined for continued upside activity over the next few

SEP-17.50 NHU UW LB=0.40 OI=177 CB=17.10 DE=28 TY=2.5% MY=6.5%

BRCM - Broadcom  $25.80  *** On The Rebound! ***

Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated
silicon solutions that enable broadband communications and the
networking of voice, video and data services.  Using proprietary
technologies and advanced design methodologies, Broadcom designs,
develops and supplies complete system-on-a-chip solutions and
related hardware and software applications for all broadband
communications markets.  Their diverse product portfolio includes
solutions for digital cable and satellite set-top boxes; cable
and DSL modems and residential gateways; high-speed transmission
and switching for local, metropolitan, wide area and storage
networking; home and wireless networking; cellular and terrestrial
wireless communications; Voice over Internet Protocol (VoIP)
gateway and telephony systems; broadband network processors; and
SystemI/O(TM) server solutions.  Shares on BRCM have been "on the
rebound" since the company raised its near-term earnings outlook,
saying revenue will rise about 10% from the previous quarter.
Analysts support this view, with CIBC World Markets, Prudential,
and Thomas Weisel recently posting bullish reports on the company.
Traders can profit from a continued recovery in its share value
with this position.

SEP-22.50 RCQ UX LB=0.35 OI=9883 CB=22.15 DE=28 TY=1.7% MY=5.2%

PHTN - Photon  $29.57  *** A New Trading Range? ***

Photon Dynamics (NASDAQ:PHTN) is a provider of yield management
solutions to the flat panel display (FPD) industry.  The company
also offers yield management solutions for the printed circuit
board assembly and advanced semiconductor packaging industries
and the cathode ray tube display and CRT glass and auto glass
industries.  The firm's test, repair and inspection systems are
used by manufacturers to collect data, analyze product quality
and identify and repair product defects at critical steps in the
manufacturing.  Shares of PHTN have recovered from a recent slump
and the question now is whether any near-term upside potential
exists for this volatile issue.  Traders can speculate on that
outcome in a conservative manner with this position.

SEP-25.00 PDU UE LB=0.35 OI=315 CB=24.65 DE=28 TY=1.5% MY=5.0%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary.

Sequenced by Maximum Yield (monthly basis - margin)
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

AMSC   11.60  SEP 10.00  QAY UB 0.40 1950  9.60  28   4.5%  12.6%
MVL    22.80  SEP 22.50  MVL UX 0.95 666  21.55  28   4.8%  10.6%
NVLS   40.02  SEP  7.50  NLQ UU 0.85 2432  6.65  28  13.9%  10.4%
DPMI   25.48  SEP 25.00  DUD UE 0.85 55   24.15  28   3.8%   8.7%
TRN    26.01  SEP 25.00  TRN UE 0.80 2025 24.20  28   3.6%   8.5%
TXN    22.81  SEP 22.50  TXN UT 0.70 1658 21.80  28   3.5%   8.0%
ELBO   31.63  SEP 30.00  LQB UF 0.85 1022 29.15  28   3.2%   7.8%
RTIX   15.21  SEP 15.00  RQK UC 0.45 7    14.55  28   3.4%   7.7%
SEBL   10.39  SEP 10.00  SGQ UB 0.25 6965  9.75  28   2.8%   6.8%
PLAB   23.36  SEP 22.50  PQF UX 0.55 202  21.95  28   2.7%   6.6%
TSA    31.50  SEP 30.00  TSA UF 0.70 110  29.30  28   2.6%   6.4%
AFCI   20.98  SEP 20.00  AQF UD 0.45 202  19.55  28   2.5%   6.2%
BRKS   24.42  SEP 20.00  BQE UD 0.25 20   19.75  28   1.4%   4.9%



Friday's Retreat Warrants Concern!
By Ray Cummins

Stocks finished an upbeat week sharply lower, despite optimistic
forecasts from a technology bellwether and new data suggesting a
recovery is underway in the U.S. economy.

The day started with a brief bout of "irrational exuberance" as
investors applauded the unexpected news from Intel (NASDAQ:INTC),
which raised its revenue forecast for the current quarter due to
stronger demand from computer makers.  The optimism soon faded
however, and by late afternoon all of the major equity indices
had retreated into negative territory.  The Dow Jones industrial
average closed 74 points lower at 9,348 and the NASDAQ Composite
Index ended 12 points lower at 1,765.  The broader S&P 500 Index
dropped 10 points to 993 with biotechnology, homebuilders, banks,
and oil & gas services among the worst performing market groups.
Trading volumes were moderate with 1.3 billion shares crossed on
the Big Board, and 1.7 billion shares swapped on the technology
exchange.  Both the NYSE and the NASDAQ saw losers crush winners
by more than 2 to 1.  In the bond market, the 10-year note closed
up 5/32, with its yield at 4.45%.


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position or to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


Symbol  Pick    Last  Month  LP  SP  Credit  CB     G/L   Status

ADI     39.51   41.51  SEP   30  35   0.65  34.35  $0.65   Open
BOW     38.57   43.12  SEP   30  35   0.60  34.40  $0.60   Open
MXIM    39.11   43.78  SEP   30  35   0.65  34.35  $0.65   Open
BBY     47.90   50.08  SEP   40  42   0.30  42.20  $0.30   Open
JCI     96.49   98.31  SEP   85  90   0.65  89.35  $0.65   Open
MBI     53.13   54.42  SEP   45  50   0.65  49.35  $0.65   Open
WMT     57.77   58.40  SEP   50  55   0.50  54.50  $0.50   Open
BSX     63.25   65.61  SEP   50  55   0.40  54.60  $0.40   Open
SNPS    66.53   67.51  SEP   55  60   0.50  59.50  $0.50   Open
LOW     48.90   52.91  SEP   42  45   0.00  45.00  $0.00  No Play

LP = Long Put  SP = Short Put  CB = Cost Basis  G/L = Gain/Loss

The new position in Lowe's (NYSE:LOWE) was not available near the
target credit, due to Monday's "gap-up" at the open.


Symbol  Pick    Last   Month  LC  SC  Credit  CB     G/L   Status

INTU    42.86   46.00   SEP   50  46   0.30  47.80  $0.30   Open
ESRX    62.23   63.48   SEP   75  70   0.60  70.60  $0.60   Open
DB      59.64   58.10   SEP   70  65   0.60  65.60  $0.60   Open
IFIN    28.42   28.86   SEP   32  30   0.50  30.50  $0.50   Open
SAP     27.56   28.65   SEP   32  30   0.25  30.25  $0.25   Open

LC = Long Call  SC = Short Call  CB = Cost Basis  G/L = Gain/Loss

Intuit (NASDAQ:INTU) is on the "watch" list as a test of resistance
near the sold strike at $47.50 seems likely in the coming weeks.


Symbol  Pick   Last  Month  LC  SC   Debit   B/E   G/L   Status

MWD     48.54  48.28  SEP   40  45   4.45   44.45  0.55   Open
MGAM    24.97  26.05  SEP   20  22   2.30   22.30  0.20   Open
MUR     52.94  53.81  SEP   45  50   4.45   49.45  0.55   Open

LC = Long Call  SC = Short Call  B/E = Break-Even  G/L = Gain/Loss

Multimedia Games (NASDAQ:MGAM) was not available at the target
debit, however the risk/reward outlook (potential profit of 8%)
at a basis of $22.30 was acceptable for conservative traders.


No Positions


Stock   Pick   Last   Expir.  Long  Short  Initial   Max.   Play
Symbol  Price  Price  Month   Call   Put   Credit   Value  Status

SHPGY   22.77  22.77   JAN     30    17     0.00    0.15    Open
AVCT    27.83  29.87   SEP     30    25    (0.10)   1.30    Open?
DV      27.16  25.75   NOV     30    25    (1.30)   0.00   No Play

Avocent (NASDQ:AVCT) was the big winner this week with a potential
profit of up to $1300 on $950 initially invested in less than one
month.  Devry shares (NYSE:DV) "gapped-up" on Monday, offering no
opportunity to trade the synthetic position, and the subsequent
sell-off on news of lower fourth-quarter profits was not conducive
to a new entry in a bullish play.


No Open Positions


Stock   Pick   Last     Long     Short   Current   Max.    Play
Symbol  Price  Price   Option    Option   Debit   Value   Status

GP      19.25  22.61   OCT-20C   SEP-22C   1.90    1.75    Open
MSFT    27.31  26.22   JAN-27C   SEP-27C   1.20    1.20    Open
NE      34.86  35.06   DEC-37C   SEP-37C   1.15    1.50    Open
ING     19.07  19.86   JAN-20C   SEP-20C   0.75    1.00    Open
SPW     44.65  48.15   DEC-47C   AUG-47C   2.50    3.20   Closed
NSM     22.77  28.13   JAN-20C   SEP-25C   3.90    5.30    Open
BDY     20.65  24.28   JAN-22C   SEP-22C   1.35    1.60    Open?
MDCO    26.17  27.71   JAN-30C   SEP-30C   1.50    1.60    Open

National Semiconductor (NYSE:NSM) has exceeded all expectations,
offering a potential profit of up to $1.40 on $3.90 invested in
less than one month.  The position in SPX Corporation (NYSE:SPW)
was closed during Monday's rally as there was not enough premium
in the SEP-$50 call to warrant a transition to a diagonal spread.
The recent position in Brady Pharmaceuticals (NYSE:BDY) was far
more bullish than we expected, but the brisk upside activity on
the day after the spread was offered left little opportunity to
enter the play at the target debit and required close attention
to achieve a profit before issue continued its sharp rally.  The
position will be removed from the summary next week.


Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

OVER    23.68  23.86   SEP   25    22     1.50     1.60   Closed
SNE     30.74  32.41   OCT   30    30     3.75     4.35    Open
AMTD    10.00  10.07   OCT   10    10     1.45     1.25    Open
TRI     30.50  31.01   NOV   30    30     4.90     4.75    Open
ADBE    34.36  37.40   SEP   35    35     2.80     4.25    Open

Adobe Systems (NASDAQ:ADBE) was a winner this week, offering up
to $1.45 gain on $2.80 invested in less than five days.  The Sony
(NYSE:SNE) straddle has also achieved a small profit, however the
position in Overture (NASDAQ:OVER) has been closed to preserve


No Open Positions

Questions & comments on spreads/combos to Contact Support


This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.


These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing.  Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.

ISIL - Intersil  $27.58  *** Testing 52-Week Highs! ***

Intersil Corporation (NASDAQ:ISIL), a world leader in the design
and manufacture of high performance analog and wireless networking
solutions.  Intersil's product portfolios address fast growing
markets such as flat panel displays, optical storage (CD and DVD
recordable), power management and wireless networking.  Intersil
brings added customer value in providing silicon, software and
reference design solutions to unique products that enhance the
computing experience for people wherever they live, work or

ISIL - Intersil  $27.58

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-22.50  UFH-UX  OI=175  ASK=$0.20
SELL PUT  SEP-25.00  UFH-UE  OI=246  BID=$0.45
POTENTIAL PROFIT(max)=11% B/E=$24.75

POWI - Power Integrations  $32.08  *** Up-Trend Intact! ***

Power Integrations (NASDAQ:POWI) designs, develops, manufactures
and markets proprietary, high-voltage, analog integrated circuits
for use primarily in alternating current to direct current power
conversion.  The firm's products address market segments including
communications, consumer, computer and industrial electronics.
The company's high-voltage power conversion ICs include TOPSwitch,
TinySwitch, LinkSwitch and DPA-Switch.  Since introducing its
TOPSwitch family of products in 1994, the company has shipped into
the market approximately 890 million ICs.  These ICs achieve a high
level of system integration by combining a number of electronic
components into a single IC.

POWI - Power Integrations  $32.08

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-25.00  QPW-UE  OI=196  ASK=$0.30
SELL PUT  SEP-30.00  QPW-UF  OI=122  BID=$0.75
POTENTIAL PROFIT(max)=11% B/E=$29.50

VIA'B - Viacom CL-B  $44.64  *** Trading Range? ***

Viacom (NYSE:VIA), together with its subsidiaries, is a widely
diversified worldwide entertainment company.  The company owns
and operates advertiser-supported basic cable television program
services through MTV Networks and BET: Black Entertainment TV and
and premium subscription television program services through the
Showtime Network in the United States and internationally.  The
Television segment consists of the CBS and UPN television networks.
Infinity's operations are focused on "out-of-home" media with
operations in radio broadcasting.  The Entertainment segment's
principal businesses are Paramount Pictures, which produces and
distributes motion pictures.  The company operates in the home
video retail business, which includes both rental and sale of
videocassette and DVD products.  The company also publishes and
distributes consumer hardcover books.

VIA'B - Viacom CL-B  $44.64

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-40.00  VMB-UH  OI=3835  ASK=$0.25
SELL PUT  SEP-42.50  VMB-UV  OI=6025  BID=$0.50
POTENTIAL PROFIT(max)=11% B/E=$42.25

AMGN - Amgen  $66.48  *** Consolidation Underway! ***

Amgen (NASDAQ:AMGN) is a biotechnology company that discovers,
develops, manufactures and markets human therapeutics based on
advances in cellular and molecular biology.  Amgen manufactures
and sells human therapeutic products including Epogen, Neupogen,
Aranesp, Neulasta and Kineret.  Amgen focuses its research and
development efforts on therapeutics delivered in the form of
proteins, monoclonal antibodies and small molecules in the areas
of nephrology, cancer, inflammation and neurology and metabolism.
The company has research facilities in the United States and has
clinical development staff in the United States, the European
Union, Canada, Australia and Japan.  Amgen has acquired Immunex,
a biopharmaceutical firm dedicated to developing immune system
science to protect human health.  Immunex has developed two
major products, Enbrel and Leukine, and has two other products,
Novantrone and Thioplex, which can be used in treating multiple

AMGN - Amgen  $66.48

PLAY (speculative - bearish/credit spread):

BUY  CALL  SEP-75.00  YAA-IO  OI=5712   ASK=$0.10
SELL CALL  SEP-70.00  YAA-IN  OI=12854  BID=$0.50
POTENTIAL PROFIT(max)=9% B/E=$70.45

MEDI - MedImmune  $34.58  *** Too Much Flu Vaccine? ***

MedImmune (NASDAQ:MEDI) is a biotechnology company with a range of
unique products on the market and a diverse product pipeline.  The
firm is focused on using advances in immunology and other biological
sciences to develop new products that address significantly unmet
medical needs in areas of infectious disease, immune regulation and
cancer.  MedImmune actively markets three products, Synagis, Ethyol
and CytoGam and MEDI's Chief Executive David Mott expects the FDA to
approve its inhaled influenza vaccine FluMist sometime this quarter.
MedImmune will co-market the vaccine with Wyeth and the companies
expect to provide the vaccine initially to healthy people between 5
and 49 years old, which will mean a potential market of 160 million
people a year in the United States.

MEDI - MedImmune  $34.58

PLAY (conservative - bearish/credit spread):

BUY  CALL  SEP-40.00  MEQ-IH  OI=9160  ASK=$0.20
SELL CALL  SEP-37.50  MEQ-IU  OI=8420  BID=$0.45
POTENTIAL PROFIT(max)=11% B/E=$37.75


These candidates offer a risk-reward outlook similar to credit
spreads, however there is no margin requirement as the initial
debit for the position is also the maximum loss.  Since these
positions are based primarily on technical indications, traders
should review the current news and market sentiment surrounding
each issue and make their own decision about the outcome of the

CTSH - Cognizant Technology  $31.90  *** Solid Outlook! ***

Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life
cycle solutions to complex software development and maintenance
problems that companies face as they transition to e-business.
These information technology (IT) services are delivered through
the use of a seamless on-site and offshore consulting project
team.  The company's solutions include application development
and integration, application management and re-engineering
services.  The company's customers include ACNielsen Corporation,
ADP, Incorporated, Brinker International, Incorporated, Computer
Sciences Corporation, The Dun & Bradstreet Corporation, First
Data Corporation, IMS Health Incorporated, Metropolitan Life
Insurance Company, Nielsen Media Research, Incorporated, PNC
Bank and Royal & SunAlliance USA.

CTSH - Cognizant Technology  $31.90

PLAY (less conservative - bullish/debit spread):

BUY  CALL  SEP-25.00  UPU-IE  OI=66   ASK=$7.10
SELL CALL  SEP-30.00  UPU-IF  OI=734  BID=$2.60
POTENTIAL PROFIT(max)=11% B/E=$29.50

HSY - Hershey Foods  $69.64  *** A Reader's Request! ***

Hershey Foods Corporation (NYSE:HSY) is the leading North American
manufacturer of quality chocolate and non-chocolate confectionery
and chocolate-related grocery products.  Some of the firm's most
popular products include Hershey's milk chocolate bars, Hershey's
Kisses chocolates, Reese's peanut butter cups, Jolly Rancher, and
Twizzlers candies.  The company also is a market leader in the gum
and mint category and also makes flavored syrup and cocoa.

HSY - Hershey Foods  $69.64

PLAY (speculative - bearish/debit spread):

BUY  PUT  SEP-75.00  HSY-UO  OI=48   ASK=$5.50
SELL PUT  SEP-70.00  HSY-UN  OI=132  BID=$1.40
POTENTIAL PROFIT(max)=21% B/E=$70.90


A calendar spread (or time spread) consists of the sale of one
option and the simultaneous purchase of an option of the same
type and strike price, but with a future expiration date.  The
premise in a calendar spread is simple: time erodes the value of
the near-term option at a faster rate than the far-term option.
The positions in this section are speculative (out-of-the-money)
spreads with low initial cost and large potential profit.

GNTA - Genta  $13.95  *** Genasense Speculation! ***

Genta Incorporated (NASDAQ:GNTA) is a biopharmaceutical company
with a diversified product portfolio that is focused on delivering
innovative products for the treatment of patients with cancer.  The
company's research platform is anchored by two major programs that
center on oligonucleotides (RNA/DNA-based medicines) and small
molecules.  Genasense (oblimersen sodium), the firm's lead compound
from its oligonucleotide program, is being developed with Aventis
and is currently undergoing late-stage, Phase 3 clinical testing.
The leading drug product in Genta's small molecule program is
Ganite(gallium nitrate injection), which the company intends to
launch this year for treatment of cancer-related hypercalcemia that
is resistant to hydration.

GNTA - Genta  $13.95

PLAY (speculative - bullish/diagonal spread):

BUY  CALL  OCT-12.50  GJU-JV  OI=911  ASK=$3.40
SELL CALL  SEP-15.00  GJU-IC  OI=135  BID=$1.35


Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.

BBY - Best Buy  $50.08  *** Earnings Speculation! ***

Best Buy (NYSE:BBY) is America's leading specialty retailer of
consumer electronics, personal computers, entertainment software
and appliances.  The company's subsidiaries operate retail stores
and/or Web sites under the names: Best Buy (BestBuy.com), Future
Shop (FutureShop.ca), Geek Squad (GeekSquad.com), and Magnolia
Hi-Fi (MagnoliaHiFi.com).  The company's many subsidiaries reach
consumers through nearly 700 retail stores in the United States
and Canada.  Best Buy's quarterly earnings report is due 9/17/03.

BBY - Best Buy  $50.08

PLAY (very speculative - neutral/debit straddle):

BUY CALL  SEP-50.00  BBY-IJ  OI=11536  ASK=$2.05
BUY PUT   SEP-50.00  BBY-UJ  OI=1428   ASK=$2.00


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