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Daily Newsletter, Monday, 08/25/2003

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The Option Investor Newsletter                   Monday 08-25-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Wall Street Wavers
Futures Wrap: Home on the Range
Index Trader Wrap: Isn't Labor Day next Monday?
Traders Corner: Fantasy vs. Reality


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-25-2003            High     Low     Volume Advance/Decline
DJIA     9317.64 - 31.23  9350.77  9280.94 1.21 bln   1155/1622
NASDAQ   1764.31 -  1.01  1768.12  1752.12 1.13 bln   1269/1703
S&P 100   497.66 +  0.24   497.72   495.07   Totals   2424/3325
S&P 500   993.71 +  0.65   993.71   987.91
RUS 2000  483.87 -  1.64   485.51   480.99
DJ TRANS 2633.01 -  8.55  2649.07  2624.08
VIX        20.32 +  0.05    20.94    20.23
VXN        29.34 -  0.13    30.10    29.09
Total Volume 2,510M
Total UpVol    985M
Total DnVol  1,457M
52wk Highs     248
52wk Lows       40
TRIN          1.14
PUT/CALL      1.21
*******************************************************************

Wall Street Wavers
by James Brown

Major indices across the globe wavered on either side of
unchanged today but the general mood and result was down.  U.S.
indices the Dow Jones Industrial lost 31 points to close at 9317,
the NASDAQ Composite lost one point to close at 1764 and the S&P
500 added 0.65 to close at 993.71.  Expectations for this week
were mixed but after Friday's apparent one-day bearish reversal
many investors were looking for some follow through by the bears.
Traditionally, lack of volume, which was an issue today, favors
the bears but even an overflow of sellers couldn't push the major
indices very far.

The selling was heaviest in the technology related sectors but
gold stocks joined the decline.  The bond market also lost ground
pushing the yield on the 10-year note up to 4.527%.  Declining
stocks out paced advancing stocks 16 to 11 on the NYSE and 17 to
12 on the NASDAQ.  New highs rang in at 199 with new lows at 24
between the two exchanges.  Down volume was about 50% greater
than up volume across the markets with total volume squeaking in
at a very low 1.16 billion on the NYSE and 1.1 billion on the
NASDAQ (rounded up).

Chart of the Dow Industrials:




Chart of the NASDAQ:




Housing Market Peaks

Economists and analysts who had been expecting existing home
sales to come in at an adjusted rate of 5.94 million were
surprised to see sales jump 5% to a new record high at 6.12
million in July.  The financial media was quick to report that
this morning's numbers were based on closing transactions.  That
most likely means this July's existing home sales record is based
on consumer decisions made in May and June when mortgage rates
were at their lowest.  One industry expert went so far as to say
that we may have just witnessed the peak in the U.S. housing
market.  They may not be far off the mark since the average 30-
year fixed rate mortgage was a record low of 5.23 percent in
June.  The average 30-year mortgage jumped to 5.63% in July.

The incredible sales pace pushed up home prices by 12.1 percent
in the past 12 months.  The median home sold for $182,100 in July
and the year-over-year price increase was the largest since
November 1980.  Bloomberg reported that one executive with
Century 21 Real Estate believes that while we may have hit a peak
the U.S. probably won't see a significant slow down.  An
improving economy with interest and mortgage rates still near
historic lows will keep home sales strong.  However, most
analysts believe that home price appreciation will likely slow to
a more reasonable 4-to-5 percent.  The strong home sales number
is actually good news for the economy as home sales spur
additional purchases for consumer durables.

Despite the positive implications of today's numbers is wasn't
enough to spur the markets higher as some see the report as a
lagging indicator.  Tomorrow's New Home Sales report should carry
more weight with Wall Street.

Wal-Mart & Intel Spotlight Again

Making the headlines again was Arkansas-based Wal-Mart
(NYSE:WMT).  The largest retailer on the planet said back-to-
school sales have come in so strong that they are raising their
August forecast from 3-to-5 percent to 4-to-6 percent.  After
some mid-day profit taking shares of WMT did bounce to close back
over the $59 mark.  Following its lead was the S&P retail index
(RLX), which bounced into the closing bell for a fractional gain.
Analysts believe that this is good news for the retailing
sector's upcoming fourth quarter and the country's GDP as
consumers represent 2/3rds of the economy.

Another Dow component grabbing the spotlight was semiconductor
giant Intel Corp (NASDAQ:INTC).  Almost half a dozen analysts
upgraded their price targets on the stock.  Some of the larger
names making positive comments were Smith Barney, who raised
their price target to $30; Bear Stearns, who raised their price
target to $31; and Prudential, who raised their price target to
$34.  Unfortunately all the positive comments couldn't lift
shares and Intel continued its profit taking from Friday's close.

Component Downgrades

The only analyst comments that traders were paying attention to
were downgrades for two Dow Jones Industrial components.
Prudential dropped its rating on the world's largest aluminum
producer Alcoa (NYSE:AA) from a "buy" to a "hold".  The analyst
claims that the stock is already "fully valued" and sports nearly
twice the P/E to its closest competitor Alcan.  Shares lost 1.2
percent on the session and rebounded strongly from its lows of
the day.  Meanwhile, fellow component Caterpillar (NYSE:CAT) lost
more than 2.8 percent after an analyst at Legg Mason sliced his
rating on the stock from a "buy" to a "hold".  The move was
mainly based on valuation concerns, which isn't surprising given
CAT's 75% rise in share price from its February 2003 lows.

Tomorrow

Tuesday's trading is currently a toss up.  Market direction will
be heavily influenced by the economic reports due out tomorrow.
Before the bell will be the Durable Goods Orders for July.
During the session expect to hear the latest Consumer Confidence
numbers for August and the New Home Sales for July.  Plus we're
always at risk for a terrorist event.  Markets didn't move much
on the bombing in India today but headlines like this do keep
investors on edge and fingers close to the sell button.  If
you're a "glass is half full" kind of trader then the late
afternoon bounce today might materialize into something stronger.
Unfortunately, the general mood seems to be "sit back and watch",
which given the low volume will probably lean toward additional
profit taking.  We are approaching September and everyone knows
it is historically the worst month of the year.  With this big
black cloud on the horizon the easiest bets are probably not
bullish ones.


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

Home on the Range
Jonathan Levinson

Equities respected a narrow, difficult range throughout the
session punctuated by a few sudden moves that, amplified by
boredom, felt far more impressive than they actually were.

Chart of the 150 tick ES




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






10 minute chart of the US Dollar Index




The US Dollar Index was volatile today, recovering its losses
from the overnight selloff but unable to sustain gains above the
98.90 resistance level from which the European selling began.
The euro weakened against the dollar in the afternoon, while gold
was weak throughout the day.  The CRB was strong in the morning
but pulled back as the session progressed, maintain the 240 level
on strength from cocoa, lean hogs and coffee futures.


Daily chart of December gold




December gold had a disappointing day, insofar as it failed to
make it to the upper trendline near the top of its up-phase,
while respecting the secondary steeply ascending trendline within
the broader pennant we've been tracking.  If it doesn't reverse
tomorrow or Wednesday, we could be on a fresh sell signal from a
lower high, which would certainly not be a bullish development in
the short term.  Nevertheless, none of the downside supports were
violated, and so today leaves us with an unresolved question as
to nearterm direction.  December gold lost 2 to 362.30, HUI lost
63 to close at 180.08, and the XAU dropped .95 to close at
85.83.


Daily chart of the ten year note yield




Over the weekend, I described the then-current level of the ten
year note yield as a difficult one to gauge, and today bore that
out.  The stochastic and macd oscillators remain conflicted, but
today's 6.8 basis point rise found support on the secondary
rising trendline while staying below the primary daily uptrend
line.  The TNX closed at 4.527%.  Note that the upper Bollinger
band has flattened, which will provide resistance on any rally in
the yield.  The outlook is beginning to look more negative in the
intermediate term for the TNX, but timing it will be the tricky
part.  A retest of the high would answer a great number of
question, if the market will give it to us.

Daily NQ candles




Today's action violated the ascending daily trendline, and the
lack of significant gains following Friday's negative close gave
the oscillators the first suggestion of a pause within their
uptrends.  The 10 day stochastics remain in a clear up-phase, and
a revisit of Friday's highs cannot be ruled out.  However, if the
price fails to advance shortly, the oscillators will roll over,
setting up last Friday's shooting star doji as the high of this
up-phase.

30 minute 20 day chart of the NQ




Zooming in to the 30 minute candles, we see that the small gains
today were sufficient to work off the bulk of the oversold
extreme on the oscillators, which are currently on sell signals.
The lack of traction on the 300 minute stochastic is encouraging
for bears, but the macd is only at the beginning of its buy
signal.  The outlook remains mixed, but my expectation is for
more immediate upside.  The top of this up-phase will help
clarify our outlook for the oscillator up-phase on the daily
candles above.

Daily ES candles




The ES came as low as 987, and despite the end-of-session gains,
began what appears to be the beginning of a fresh down-phase, the
stochastic just beginning to roll over.  As with the last
downphase, it is rolling from below the 80 level, which indicates
that the up-phase was weak.  980-2 remains key support here, as
the top of the broken upper trendline on the bull flag.

20 day 30 minute chart of the ES




The up-phase on the 30 minute candles was stronger today than
that of the NQ, with the 300 minute stochastic exceeding the
descending trendline that preceded Friday's collapse.  Again, it
looks like more upside is due, but price-wise, the gains were
minimal today, and the bills are running out of time on this up-
phase to repair the damage done on Friday.


Daily YM candles




The YM broke below its daily trendline today, and is the closest
to the commencement of its daily cycle downphase.  The stochastic
is on a sell signal, with the macd on a bearish kiss from a lower
high.  The upward bias still remains, however, as demonstrated by
the recent higher lows on the 10 day stochastic.


20 day 30 minute chart of the YM





The YM closed just below key resistance at 9330 on the 30 minute
candles, on late buy signals on its oscillators.  With the daily
cycles topping out but the 30 minute still with room to run
within its up-phase, there's good potential for more rangebound
trading, but the short term outlook remains biased to the bullish
side because of the ongoing up-phase.

For tomorrow, I expect to see a continuation to the current
bounce within the context of the end of the daily cycle up-phase.
While there's room for another push to the highs on this longer
timeframe, the bulls will need to show considerably more
commitment than they did today.


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

Isn't Labor Day next Monday?

Volumes were their lightest for a full day of trading with the
New York Stock Exchange trading just over 887 million shares and
the NASDAQ churning a light 1.06 billion shares in what might as
well have been a Friday trade ahead of a three-day weekend.

The major indices finished mixed as the Dow Industrials (INDU)
9,317.64 -0.33% never could shake the early morning doldrums
after downgrades based on "valuation" had Alcoa (NYSE:AA) $27.79
-1.2% and Caterpillar (NYSE:CAT) $69.66 -2.83% traded lower on
profit taking, after impressive moves higher earlier this month.

Mixed sector action found both the S&P 500 Index (SPX.X) 993.71
+0.06% and S&P 100 Index (OEX.X) 497.66 +0.04% posting fractional
gains by the close as lower beta groups like the Pharmaceutical
Index (DRG.X) 301.55 +0.70%, S&P Banks Index (BIX.X) 300.61 +0.7%
and Utility Index (UTY.X) 274.27 +0.63% were today's trifecta
sector winners.

Words of caution and longer-term bullishness from various brokers
provided a mixed session among technology sectors and found the
NASDAQ-100 Index (NDX.X) 1,306.64 +0.16% putting together an
afternoon move higher to finish up 2.1 points, while its Tracking
Stock (AMEX:QQQ) $32.51 +0.21% rose 7 cents on 42.6 million
shares, which was impressive if only compared to its post-
blackout 28.1 million shares of August 15.

Treasury bond traders cited today's selling in Treasuries not
only due to the stronger-than-forecasted existing homes data, but
credit rating agency Fitch Ratings downgrading the subordinated
debt and preferred stock ratings of U.S. housing finance company
Freddie Mac (NYSE:FRE) $51.66 +4.42%, and Moody's Investor
Service saying it may cut the company's financial strength
rating, after Freddie Mac's new chief executive was pushed out.

Fitch lowered their rating to AA-minus from AA and said they
could be cut further.  Do downgrades affect about $10 billion of
preferred stock and subordinated debt, with some traders saying
the debt may have had some leverage mortgage traders selling
Treasuries on lowered ratings by Fitch.

The 10-year YIELD ($TNX.X) rose 6 8 basis points to 4.527% while
the September 10-year futures contract (ty03u) $110'23 -0.43%
fell 15/32.

I made note in today's Market Monitor that short interest data
had been published over the weekend, with data current for August
15, 2003.

Bears continue to show conviction and perhaps a high tolerance
for pain as short interest grew from July 15 to August 15 and
continues to build to annual highs.

The Diamonds Series Trust (AMEX:DIA) $93.48 -0.24% short interest
grew to 23.3 million shares by August 15, up from 21.3 million on
July 15.  Days to cover stood at 3.43 versus July 15 2.96.  Short
interest on the DIA has been rising steadily since January 15
11.75 million shares.

The SPDR Trust (AMEX:SPY) short interest on August 15 stood at
113.1 million shares, up from July 15 short interest of 96.3
million shares.  Days to cover rose to 2.71 from 2.39 in July.
Short interest has been growing steadily for the SPY since March
14 60.2 million shares short.

Short interest on the NASDAQ-100 Trust (AMEX:QQQ) grew to 287.7
million shares on August 15, up from 260.1 million shares on July
15.  Days to cover rose to 3.75 from 3.21.  Short interest on the
QQQ has been growing steadily since April 15 151.7 million
shares.

Diamonds Trust (AMEX:DIA) Chart - Daily Interval




I've placed the last six months of short interest data on the
Daimonds Trust (DIA) chart.  In mid-July, bears looked to be
getting control of the DIA with a break even reading trade of
$91.59 with the mid-June DIA close of $91.58.  While it is often
thought that shorts are eventually proved correct as they have
more to lose that bulls (infinity vs. known amount to $0.00) I'd
think that two months of bears might find pullback support near
DIA $91.60.  This may not be too far from the DIA's MONTHLY Pivot
of $91.70.  Let's check the Dow Industrials (INDU) 9,317.65
-0.33%, but envision some of the levels above with its
WEEKLY/MONTLY retracement overlaid.

Dow Industrials (INDU) Chart - Daily Interval




Of the major index trackers, its the QQQ and DIA that have the
higher Days To Cover (DTC) and with summer-time volumes
relatively light, may be first to benefit from short covering.
This short-covering, where bears have perhaps been their own
worst enemy could help explain the recent news highs for both the
NDX/QQQ and INDU, while the SPX/OEX were unable to set new 52-
week highs last week.

As the above chart shows Stochastics now barreling down and
nearing oversold, I would think a bull looking for pullback entry
trade would like to see the INDU/DIA pull back near their MONTHLY
pivot, then look for the slingshot rebound back higher with a
target of 9,500.  Three levels of support currently in play above
9,270 as will as rising 21-day SMA.

Today's trade saw no net change in the very narrow Dow
Industrials Bullish % ($BPINDU) and status remains "bull
correction" status at 80% for the 17th-straight session.

S&P 500 Index Chart - Daily Interval




The regional banks depicted by the S&P Banks Index (BIX.X) 300.61
+0.70% went in the hole early with a session low of 296.40, and
gave an early look that two reversal days from SPX 1,010 last
week were sure to cave in.  However, the BIX.X mustered out a
respectable gain and found support at its August 8th low, which
is where the SPX would have found 963 support earlier this month.

In today's Market Monitor and 11:00 Intra-day update I made note
of the Stock Trader's Almanac mentioning that the last 6 years
have been "murderous" with the S&P falling 4.3% on average.
While the last two years have certainly seen sharp declines the
last week of August, I'm also looking back at the last week of
August in 2000 when the SPX was showing three-months of some
topping consolidation and had been trading either side of its 21-
day and 50-day SMA's, not too unlike the SPX is today.  The SPX
managed a 1% gain in 2002, but after Labor Day Weekend, bulls
pulled the plug and the SPX fell from its September 01, 2000
relative high of 1,530 (which was just off its all-time high of
1,552.87) to 1,436.51 by months end.

Today's trade saw no net change in the broader S&P 500 Bullish %
($BPSPX).  On Friday, the S&P 500 Bullish % saw a net gain of
0.60%, or 3 stocks to new point and figure buy signals.  Still
"bull correction" status and would need a reversal reading of 80%
to get back into "bull confirmed" status.

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




July durable goods orders are due out before the opening bell
(forecast is +1.0% compared to June's +2.3%), and an inline
number may see the OEX hovering near the 498 level or 500, which
is both "psychological," but also at the apex of the triangle
that the OEX has been trading either side of in recent weeks
after a sharp break below and then back above last week, into
tomorrow's 10:00 AM EST release of August consumer confidence and
July New Home Sales.

While MACD is rolling a bit, it is still above its Signal and
zero level, so view it near-term bullish.  Meanwhile Stochastics
now near "oversold" and would tie in the mid-point of regression
and WEEKLY S2 of 490.82 as a correlative support level.  If
490.82 is tested, would then look for a near-term "oversold
bounce" back to 500.00 max, and then 1.5 step backward to base of
regression channel, MAX 480.

Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX)
and still remains "bull confirmed" at 84%.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals




Amazingly, the QQQ gapped to MONTHLY R1 on Friday, then reversed
into the close.  Bulls would have been more likely to take some
profits on the gap to that resistance the bears willing to short
another new high.  With short interest continuing to build, but
still seeing a pattern of higher highs and higher lows, I would
certainly think the QQQ's build some support at $31 to $31.28
after last week's new highs.

I've marked two "shorts rush!" points on the above QQQ chart only
to show some strong upward movement where shorts/bears most
likely rushed to cover some positions, and good short-term
bullish entry points for another pop back higher came from the
$31.28 level.

Today's trade saw no net change in the NASDAQ-100 Bullish %
($BPNDX) and status remains "bull correction" status at 75.00%.

I do think institutions are the bigger short in the QQQ.  The
reason I say this is as the NASDAQ-100 Bullish % has reached 90%
and HIGH level of bullish risk, there has likely been a lot of
portfolio/inventory hedging taking place with the QQQ as the
hedge instrument.

I would certainly tie in the recent low bullish % reading of 64%
with the recent QQQ low of $29.93, and breaks below either would
be considered bearish.

Pivot Analysis Matrix




Jeff Bailey


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

Fantasy vs. Reality
by Mark Phillips
mphillips@OptionInvestor.com

I actually love it when bullish sentiment gets as skewed as it
currently is, because as everyone continues to pile onto the
bullish side of the boat, it makes it that much easier to tip
over.  It almost seems to be a foregone conclusion now that the
broad market is going to break out to the upside and we'll
continue with the recent strength right into the end of the year.

I've been harping on the VIX endlessly for the past couple
months, reiterating what we know to be historical fact -- that
when the VIX falls under 20, we're in the danger zone,
approaching the tipping point where the bullish action ends,
accompanied by a rising VIX.  So far, there hasn't been any real
pronounced weakness, with the NASDAQ surging to new highs for the
year last week.  Adding its voice to the mix, the DOW cleared its
June 17th high and traded right to the pivotal 9500 level early
on Friday.  Only the S&P 500 is conspicuous in its inability to
trade new highs for the year.  At the same time, the VIX has been
probing the 20 level, closing below that mark on 4 different
occasions in the past month.  So far, no sell off.

In fact, a look at the long-term VIX chart shows it trying to
break below the bottom of the bearish descending triangle that
has been building for the past 17 months.  Take a look below, and
you can certainly see what looks like a price pattern that should
break to the downside.  Each attempt at an upside breakout has
been quickly turned back over the past 10 months and there's
certainly nothing on the chart below to hint that things are
going to change anytime soon.

Weekly Chart of the VIX




Switch to a monthly timeframe though and we can see how the odds
are stacked against a major breakdown in the VIX.  Simply put,
when the VIX gets below 20, there are just too many bulls already
on board and the FEAR emotion begins to get the better of the
GREED emotion, resulting in the inevitable (my opinion) selloff
in the market accompanied by a rising VIX.

Monthly Chart of the VIX




Despite some brief forays below the 19-20 area, you can see that
the lowest close for the VIX on a monthly basis (recorded 8/00)
was 19.28 and was followed by a rise that eventually took the VIX
back over 40 in March of 2001.  The chart above encapsulates
almost 6 years of data, and you can see that betting on a major
breakdown in the VIX to new lows is flying in the face of the
historical evidence.

So why have I gone through the trouble of restating what most of
you know already?  It all comes down to what I see in the media
and the content of emails that I tend to get when conditions look
as they do now.  The story always has minor variations, but
essentially, the analysis (and I use that word loosely) says that
this time it is different and the VIX is going to break
significantly lower as the next leg of the market rally gets
underway.  For the past 3 years (this year makes 4) the catalyst
has been the 2nd half recovery that will propel the markets
higher and give the bulls new life.

Sure there are anecdotal signs and economic reports that are
indicating the economy actually is recovering, but I have to say
that I think it is just so much bull.  How strong a recovery can
we have where jobs are not being created and layoffs are
continuing to mount?  No new jobs results in a tepid recovery, at
best.  While I'm talking about my beliefs, I feel it only fair to
state that it is my belief that we'll see the VIX at 50 again
before we see it break below the 1998 lows near 16.  I know what
you're thinking -- that a move from 20 down to 16 would
constitute a 20% decline from current levels and would allow the
markets to perhaps head higher.  I certainly won't argue with
that premise, except to recommend that you go back and look at a
daily chart of the VIX in 1998.  There were two forays under 19 -
- the first hit an intraday low of 16.09, and the second a low of
16.73.  Here's the rub though.  Did either of those moves last
very long?  No!  In fact the second one came in late July, just
before a significant selloff in the market and a VIX skyrocketing
to above 50.  I haven't done it here for the sake of space, but
go back and look at the VIX action leading up to those two lows.
Is it just me, or does that grudging decline look awfully similar
to what we've been experiencing in the current market?

As I said, the arguments for a significant decline in the VIX
from the 20 level are varied, but this time my favorite is one
put out by a reputable analyst (we'll leave names out of it),
where he's looking at the possibility of the VIX declining below
15 and actually running as low as 10.  The basis for that
assertion comes from an analysis of the price action in the VIX
during the 1992-1996 time frame where the floor for the VIX
actually was roughly 10 and the ceiling was near 20.  He's
arguing that a return to that range is certainly one possibility.
I try to keep an open mind, but I had to laugh out loud at that
one.  The primary reason why is that the current market is so
different from the one of that earlier time period, and this
individual's analysis was so superficial that he failed to look
at any other factors that might explain the reason for the start
differences.  It has nothing to do with whether we are in a bull
or a bear market, but in the character of the market in question.

To understand where I'm going, we need a clear understanding that
an alternative way of looking at the VIX is as a predictor of
future price action in the related index, in this case, the S&P
100 (OEX).  The VIX doesn't predict price direction, but it does
have a close relation to the magnitude of the expected movement.
And the magnitude of the expected movement will be based on the
magnitude of the recent historical movement.  As tight as price
action has been over the past month, it should be no great
surprise to see the VIX still holding near the lower end of its
historical range.  But as tight as price action has been
recently, it is nothing compared to what was seen in 1993-94.  I
think some actual numbers will help to make the case.

Over the past 2 months, the OEX has traded between 484-512, for a
total range of 5.5% of the indexes price at the June highs.
Taking a slightly longer view, we can see that since the
beginning of the year, the OEX has ranged from 400-512, for a 25%
range, based on where it began the year.  That sets our baseline
for comparison.  Now let's go back and look at the trading range
for 1993-94.  During all of 1993, the OEX traded in a range of
193-223, for a total range of 15% of its starting value.  1994
was even less exciting, as the OEX was confined to 201-223, for a
total range of only 10% of its starting value.  Simply put, the
range that the market was trading in was much tighter 10 years
ago that what we are experiencing right now, and we think what we
have right now is a tight-range market!  Over the past 2 months
of rangebound slop, the OEX has covered half the territory (on a
percentage basis) that it did throughout all of 1994!

You see, analyzing just the price action of the VIX without
putting it into context of what else is occurring in the
marketplace is a recipe for disaster.  This is the principle
reason why when I write about what I see in the market, I really
try to look at and analyze the whole picture.  It frequently
results in a long article (like this one is becoming), or one
article stretching into 3 or 4, but I hope you understand that I
do so not because I like to hear myself talk (or see my words in
print, such as the case may be), but because I am trying to
provide enough of the analysis picture so that you can not only
learn from what I'm describing, but so that sometime in the
future you'll be able to do it without my help.  Education is the
key and I'd like to think I'm more adept at teaching than handing
out trade recommendations.

Alright, that's enough VIX analysis.  I think I've sufficiently
laid out the case that any rally from here is going to have its
work cut out for it.  I don't want to focus on charts for the
remainder of our discussion, as I think they tend to mask reality
after 2 months where price action has been so clearly artificial.
The market has been propped up through the summer doldrums and I
believe a trap is being set for the average investor.  You see, I
think this market is being propped up to suck in the average
investor and give the pros and institutions some liquidity to
sell into after the Labor Day holiday.  Would they actually do
that to us?  Only if we let them!  It's the character and
background of the market where I think the interesting parallels
lie.

Here's the backdrop.  The economy is recovering and will continue
to pick up steam, fueled by the tax cuts and the surging
liquidity, resulting in a strong 2nd-half economic and market
recovery.  I want you to think back to the end of the summer of
2000 and think about the parallels.  We had just experienced the
first leg of this new bear market and the major indices had
stabilized and were working their way higher through the month of
August on typically light volume.  That was the first year we
heard the siren's song of 2nd-half recovery, but it seemed
plausible enough after a 5-month reprieve from the rampaging bull
of the past several years.  Towards the end of August, the DOW
had fought its way back near 11,300 and chatter about retesting
the January highs was in the air.  The first few days after Labor
Day were bullish, helping to convince many on the sidelines that
the resumption of the bull market was for real.  I don't think I
need to remind any of you of the less-than-bullish action that
unfolded in the subsequent weeks and months.  The decline started
on September 7th as volume began to pick up and didn't end until
October 18th when the DOW hit an intraday low of 9656, for a loss
of more than 1600 points!

So are there any conditions from 3 years ago that are common to
the current market?  We've had a nice rally through the month of
August, which has propelled the DOW through resistance and talk
has turned decidedly bullish, as perhaps the bear market is over.
At a minimum, it is expected that the midpoint of the bear market
(Dow 9500) will be crested and it is only a matter of time before
the DOW is back over the psychologically important 10,000 level.
The centerpiece of the continued rally fantasy is centered on the
fabled 2nd-half recovery -- after 3 years, you would think that
either the pundits could come up with a different story and at
the same time you would think investors would have learned not to
listen.  Well, you know what old P. T. Barnum used to say --
"There's one born every minute".  What's been bothering me about
this market is the fact that the persistent rise is taking place
on rather light volume.  As Jim frequently reminds us, volume is
a weapon of the bulls, and unless they can deliver early and
often next month, I think we'll be looking at some solid downside
action into the historically weak October timeframe.

Let's take a look at one more factor that I think is both
pertinent and common to both timeframes, brining our discussion
full circle and back to the VIX.  Do you know what the low
reading for the VIX was in late August of 2000?  It was 18.13 and
was recorded on August 28th.  So far, over the past month, the
low for the VIX has been 19.06, reached in the afternoon of
August 18th.  To me the commonalities are too striking to ignore
and I can tell you with absolute certainty that my longer-term
trading focus will be exclusively directed at bearish trades
until I am either proven to be wrong by price action, or we see
the downside price action proving that my analysis was correct.
Either way, I'll be keeping a sharp eye on the VIX, but using it
in context with price action and other pertinent factors.

Have a great week!

Mark


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The Option Investor Newsletter                   Monday 08-25-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - BSX
Watch List: Mainly Overbought and Looking Weak

Updated on the site tonight:
Market Posture: Profit Taking Continues



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

Boston Scientific - BSX - cls: 65.75 chg: +0.14 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)

Most Recent Update (Sunday, August 24, 2003):
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".

- Play of the Day Comments -
Sunday's update for BSX said we wanted to see a bounce from the
$64-65 region.  We may have got that bounce today with the low at
$64.90.  More confidence bulls can evaluate entries at current
levels while more conservative traders may want to wait for a
move back over $66.00.

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).

BUY CALL SEP 65 BSX-IM OI=31485 at $3.60 SL=1.85
BUY CALL SEP 70 BSX-IN OI=17076 at $1.40 SL=0.80
BUY CALL OCT 70 BSX-JN OI=  281 at $2.55 SL=1.20
BUY CALL NOV 70 BSX-KN OI= 2324 at $3.70 SL=1.85

Annotated chart:



Picked on August 21 at $66.50
Change since picked:    -0.75
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:    2.78 million
Chart =



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

Mainly Overbought and Looking Weak

Allergan - AGN - close: 76.75 change: -0.63

WHAT TO WATCH: Shares of AGN appear to be topping out.  The last
several weeks have seen the stock fail at overhead resistance
near $81-82 several times.  Now we're witnessing a very slow
trend of lower highs.  Plus, we can see that AGN has bounced from
the $76 area about four times in the last two months.  A move
below $76 or $75 could be a trigger point to capitalize on a move
back toward the $70 level.  AGN's point-and-figure chart is
already showing the sell signal with a triple-bottom breakdown.

Chart=


---

AutoZone - AZO - close: 90.50 change: +0.74

WHAT TO WATCH: AZO feels like a constant candidate for the play
list or the watch list.  That shouldn't be a surprise with its
tendency to make big sweeping moves up and down.  The current
rally higher remains unbroken and AZO once again displays its
relative strength as it rebounds back above the $90 level.  Some
traders might remember the old rule of thumb that says most
stocks that trade $90 generally continue their trend higher and
trade $100.  Now that's not a maxim we would base a trade off of
but we will keep our eyes on AZO for another trading opportunity
up or down.

Chart=


---

Intl Business Machine - IBM - close: 81.90 change: -1.07

WHAT TO WATCH: We have been watching Big Blue for a while.  There
were several sessions last week where IBM failed to break over
resistance at the $84 level.  Friday's performance did break this
level but shares rolled over with the rest of the market in a
classic failed rally.  Now the rollover has continued and IBM is
back below its simple 200-dma.  We're going to be watching the
$80 level for a bounce or a breakdown.

Chart=


---

Danaher - DHR - close: 75.31 change: -0.91

WHAT TO WATCH: DHR is another recent winner that could become a
target for the bears.  Shares are up strongly after bouncing at
$65 in mid-July.  The stock hit new 52-week highs last week but
is suffering from the same profit taking that has hit the markets
the last two sessions.  A move under $75 might qualify as an
entry point for bearish plays but we do see potential support
near $72.50.

Chart=



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

CAT $69.66 - Shares of CAT lost more than 2.8 percent today after
a broker downgraded the stock on valuation concerns.  The close
under $70 doesn't look good.

PGR $69.58 - PGR has rebounded from support near the $64-65 area
but is currently struggling with overhead resistance at $70 and
its simple 50-dma.

PHM $66.70 - PHM has broken out above resistance in the $65-66
region and looks like a candidate to retest the $70-71 area.
However, traders need to be aware that the New Home Sales report
out tomorrow could have a heavy influence on PHM's direction.


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

Profit Taking Continues

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_082503.asp


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