Option Investor
Newsletter

Daily Newsletter, Thursday, 09/04/2003

HAVING TROUBLE PRINTING?
Printer friendly version
The Option Investor Newsletter                Thursday 09-04-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Dr Deflation Strikes Again
Futures Markets: Bedraggled
Index Trader Wrap: The Bernanke Put
Market Sentiment: Impressive Disbelief


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      09-04-2003           High     Low     Volume Advance/Decline
DJIA     9587.90 + 19.40  9609.09  9541.72 1.82 bln   1779/1402
NASDAQ   1868.98 + 16.10  1870.00  1848.95 1.87 bln   1858/1367
S&P 100   516.18 +  1.68   516.72   513.04   Totals   3637/2769
S&P 500  1027.97 +  1.70  1029.17  1022.19
W5000    9967.22 + 20.10  9975.58  9912.29
RUS 2000  512.56 +  1.85   512.56   508.99
DJ TRANS 2757.15 -  4.30  2763.17  2743.01
VIX        19.89 -  0.54    21.24    19.86
VXN        30.91 -  0.28    32.16    30.75
Total Volume 3,977M
Total UpVol  2,953M
Total DnVol  1,328M
52wk Highs  872
52wk Lows    21
TRIN       1.03
NAZTRIN    0.38
PUT/CALL   0.68
************************************************************

Dr Deflation Strikes Again

Not one, not two but three Fed heads took to the podium today
and tried to talk up the economy and talk down bond yields. We
will not know if they were successful for sometime but the
impact on the stock market sent it back to new 52-week highs
once again. Ben Bernanke went on record not once but twice on
Thursday saying there was a good chance the Fed could cut rates
again. Somebody pinch me I must be dreaming.

Dow Chart



Nasdaq Chart



S&P Chart





This was a day full of surprises. In fact I am surprised we are
not butting heads at 9700 instead of 9600. There was good news,
great news and just enough lingering economic problems to keep
the plot in motion. The morning started with the Jobless Claims
which "surprised" everyone (except us) with a reading over
400,000 once again. Actually I expected it next week but it
appears enough workers went back to job hunting for the Fall to
turn the tide a week early. The headline number was 413,000 and
last weeks number was revised up to 398,000 and just nipping
under the 400K level. The four-week moving average broke the
400K barrier once again at 402,000 and continuing claims rose
again to 3.663 million the highest level in eight months. Get
this, the Labor Dept actually said the short week prevented
some numbers from being reported and the 413K would be revised
next week. Duh! And what is different from any other week? This
is setting up next week as a pivotal number for the markets.

The Factory Orders for July jumped +1.6% compared to estimates
of only +0.7%. This is the highest level since May-2001.
Nondurable orders rose +2.4% and shipments +2.5%. What the heck
is going on here? We are actually seeing the economic reporting
for the bounce that Intel said they saw in July. This number
is a very lagging indicator and could decline in August but
investors have their sights set on Dow 10,000 and they are not
going to be deterred by old data. The key here is the positive
trend and one that is not likely to go negative again.

The ISM Services blew past estimates of 62.0 with a headline
number of 65.1, which matched last months surprise number. The
global services business has been trending up so this number
was expected to be strong but nowhere near this strong. New
Orders rose to 67.6 while inventory fell to 49.0 from 49.5.
This is setting up a strong future bounce when that inventory
needs to be replenished. One component throwing the number
out of line was the rise in prices to 55.7 from 50.6. This
is primarily due to higher oil prices being passed through
to the consumer. This distorted the headline number to the
upside.

Productivity rocketed +6.8% in the 2Q according to the revision
posted on Thursday. This was higher than estimates of +6.3%
and most of the increase was due to higher output numbers.
This is a two edged sword. While the output and productivity
is increasing it is doing so at the expense of more job cuts.
Hours worked fell another -5.9%. We are likely to see more
evidence of this with the Jobs Report on Friday. The current
unemployment rate is around 6.2% or nine million workers out
of work. I will get to the differing outlooks later but the
Jobs report is the key for tomorrow. The estimate is for a
gain of +10,000 jobs. The whisper number has been heard for
a loss of as many as -50,000 jobs. Even if we get a drop in
jobs the unemployment number is likely to fall as more and
more workers decide to give up looking. We will get to hear
Elaine Chao go on CNBC once again to tell viewers that the
drop in unemployment is good for the economy and proof the
administrations employment program is working. It makes no
difference what the numbers are tomorrow because she will
say the same thing and she will probably quote the numbers
wrong once again. I do not know whose idea it was to put her
in front of a camera but they need to be demoted. More
disposable camera fodder I assume.

Elaine Chao




The Jobs Report is the last major economic report for the week
and it is before the open. Elaine is not the only one confused
about jobs as different Fed governors voiced different opinions
about the jobs future today. Ben Bernanke said he expected the
jobs picture to remain bleak through Q4 of 2004 at the worst.
McTeer said he felt the growing economy would increase jobs
before the year end and drop the unemployment rate under 6%.
Obviously if there is a difference in opinion at the top the
outlook is very cloudy. The term Jobless Recovery has turned
into Jobloss Recovery in common usage. Historically employers
will not want to add new hires until they are confident the
recovery and demand is here to stay. We are still a long way
from that stage now.

There was so much news today the following paragraphs may
seem unconnected but I need to get it all out. Retail sales
was stronger again at +5.1% and many of the majors reported
strong gains in same store sales. Wal-Mart reported a +6%
gain in sales BUT, and here is the key, they lowered estimates
going forward. The late summer binge and a stronger than
expected back to school rush just as tax checks and tax cuts
hit consumers produced the perfect retail storm. While
rejoicing most retailers are cautioning that the majority of
the impact from those factors has already been seen. Most
retailers traded down because expectations were for an even
greater gain in sales. Investors are never satisfied.

Home buyers got a boost from Hovnanian (HOV) who said they
were able to raise prices due to demand outstripping supply.
Whoa! What happened to that bursting housing bubble? This is
just a historical trend when interest rates spike up. Buyers
rush to snap up available homes and lock in rates before any
further increases. If Bernanke was able to put some fear into
bonds again today then that interest rate window may be
opening again soon.

The chip stocks were back in form today after a brief hiatus.
The fear of the Intel mid quarter update tonight was diffused
by AMD saying business was picking up despite concern over
a potential lack of staying power. Cypress Semi said demand
was picking up although prices were still dropping. National
Semi reported earnings of 15 cents and said current quarter
bookings were the strongest in the last ten quarters. UBS
upgraded most of the chip stocks this morning and added to
the euphoric stupor. This kept the Nasdaq from selling off
at the close on fear of Intel. Intel came through in the
clinch despite the four days of back tracking by the
officers after the August update. It appears the caution
was misplaced and Intel raised its guidance to the top of
the previous range and affirmed the gross margin at 56%.
Considering the expected revenue is between $7.6-$7.8 billion
that is a massive profit. Pass the chips please, I think we
are about out of dip. Of course once all the good news is
out there is nothing for investors to look forward to.
Futures are up only slightly in after hours on the news.

An August survey of CIOs showed that 46% planned on increasing
their hardware budget while only 15.5% were planning on
decreasing it. Security software was the big winner with 51%
planning on increasing spending on security. Spending on
infrastructure software fell to only 28.6% down from 33.2%
in July. The total for the study projected an increase of
+6.4% in IT spending over the next 12 months compared to
only +4.5% for the same study in July. This matches the
Dell comments earlier in the week that there was improvement
but no meaningful pickup in spending. Intel also said the
product mix was responsible for the improvement in guidance
more than unit volume. Laptops are still leading and those
chips are more expensive than desktop computers.

Cisco added their voice to the "orders improving" chorus but
Chambers was quick to add it could only be temporary and
may not be sustainable. The caution across tech land is very
thick and I think everybody is looking behind the increase
in orders to see if there is anything in the pipeline but
they are afraid to look real close.

The Fed heads were at it today on all fronts. Mcteer,
Gramlich and Bernanke all spoke with Bernanke wielding the
biggest hammer. His speech summarized several outside groups
that do economic projections and on average suggested the
GDP would grow at a 4.7% rate through Q4-2004. Not exciting
but decent. Where he drew the most attention was commenting
on rate changes. He said he could see no "significant" rate
hike in the near future. OK, does that mean we are going to
be quarter pointed to death every month? Not according to
Ben. He even went so far as to say the next change could be
another rate cut. This slammed bond yields along with his
comments again that inflation was not the enemy but the
return of an unwelcome drop in inflation. This failure to
use the D word in repeated Fed head speeches just amazes me.
They don't trust us with the D word. We might hurt ourselves
so they are spelling it out so only the financially educated
among us can figure it out. Get real. Bernanke has tackled
the deflation monster so aggressively he has earned the
title of Dr Deflation in some circles. Just in case he did
not make himself clear in the morning speech he repeated
his comment about the next move could be a rate cut in a
late day appearance. Get this, he also said it was not the
size of the cut that mattered but how the Fed talked about
it. Bingo! This is exactly where the Fed floundered in June
and the bond market penalized them for it. It appears Ben
has taken it upon himself to be the standard bearer for the
Fed and to preach to the choir every chance he gets. Might
not be a bad strategy for a promotion should Greenspan not
get the nod for a new term. Go get them Ben!

The markets extended their run and closed at new 52-week
highs. Will wonders never cease? The Nasdaq stretched its
winning streak to seven days and a feat not seen since Feb
of 2000. The Nasdaq is closing in on 1900 and even the
bullish traders are wondering when the pause will appear.
The Dow traded over 9600 several times and tacked on a
respectable +19 points but the excitement seems to be
fading. It could have been fear of Intel keeping the wallet
on the hip. Now that Intel has passed the test we will see
if the bulls can hold the line for one more day and the
Nasdaq stretch its streak to eight.

The blue chips were mixed today with MMM getting killed to
the tune of -2.61 on valuation concerns but was offset by
PG +2.63 on another guidance increase. IBM spiked back over
$88 and GE is about 30 cents away from a new 52-week high.
Speaking of new highs there were 1186 yesterday across all
markets and 872 today. This compares to only 21 new lows
today. This market breadth is tremendous but the A/D line
is only marginal at 4:3 advancers over decliners. The volume
today was nearly a billion shares less than the total market
volume yesterday but still decent. Wednesday's volume was
the strongest since June.

It appears we are in the eye of the perfect storm across
the broader markets. Internals are good, volume is decent,
economics continue to improve and tech stocks are raising
guidance. The Fed is talking rate cuts, yields are dropping
and we are in earnings warning season with no warnings.
What else could go right? Multiple press conferences of
fraudulent insider trading by mutual funds and hedge funds
as well as massive bond trading allegations failed to deter
investors. Bullishness has risen to 55.5% with bearishness
only 18.2% according to Investors Intelligence. These are
very bad numbers on a contrarian view. The VIX closed under
20 once again and nobody seems to care. Should they?

Apparently not if all the possible factors are lining up
in favor of stocks. At least that is the predominant view.
If the economy is on fire and several estimates for the
3Q are now over +5% GDP growth then damn the technicals
and full speed ahead. Shucks, Martha, 10,000 is just over
the hill. We can get there before we run out of gas. In a
month where the term "new highs" is seldom mentioned the
markets are setting them on a daily basis. There appears
to be nothing to hold them back. Professional traders are
dumbfounded over the lack of weakness despite the good news.
It is simply a law of the market that pullbacks on profit
taking occur routinely. Except, when the bulls are charging.
With nothing but green pastures in sight each bearish stand
is promptly trampled into the dirt. The wall of worry has
turned into a super highway and traders simply see no reason
to sell. Today was a prime example. With Intel after the
close and the Jobs Report before the open you would have
thought there would be some cautious profit taking but it
did not happen. Right at the close when you would have
expected it to happen we had Dr Deflation promising another
rate cut if economic conditions did not continue to improve.
Instead of taking profits traders were adding to positions.
Pass me some more of them chips Martha. I can't wait to see
if those Fed boys will speak at the NFL halftime tonight. Do
you think they will bump Britney so Dr Deflation can speak
again?

All seriousness aside there is no reason for the markets to
sell off other than profit taking. There is also no real
resistance other than psychological between here and 10,000.
What am I missing? I feel as clueless as the dummy they send
to the kitchen for more drinks in a Scream movie never to be
seen alive again. Traders are acting like a corral full of
bulls fighting to get on the ramp to the truck thinking it
was going to a greener pasture just a few hundred points
away. They just don't know it could be going to the slaughter
house instead. Or is it? Just how high is high?

Using four different ways to calculate the potential top on
the S&P we get a surprising confluence of numbers. Using the
Bollinger bands on a monthly chart we should see an intersection
of price with the top band somewhere in the 1140 range. Using
a target from the reverse head and shoulders from 2002-2003
we project 1140 again. Coincidence? Taking a Fib retracement
from the 2000 high to the 2002 low we run into the 50% level
at 1160. Finally using a horizontal resistance from 1998, 2001
and 2002 highs we top out at 1175. I am not saying we are
going to be anywhere close any time soon but if we did continue
up this is where the granddaddy of all resistance levels
appears to converge. Somewhere in the 1140-1175 range and
it promises to be serious resistance. Now, with that in
perspective Keith's 1060 possibility for this current rally
looks like a real possibility. (Keith gives Elliott Wave
projections in the Futures Monitor.)

S&P Monthly resistance chart





Friday could be a pivotal day in the markets. We could easily
go either way a couple hundred points and nobody knows which
way. The Jobs report is already factored in despite what
Elaine says on CNBC tomorrow. The 413,000 Jobless Claims
today accomplished that task. Unless it is a disaster it
will be taken as just one more month in the Jobloss Recovery
and a necessary mile marker in the road to 10,000. Once that
is out of the way the direction will be up to the bulls. The
bears have no strength and every dip they manufacture is
quickly bought. Until the bulls tire of the game and garner
more profits than they want to risk we are still in dip
buying mode. The bulls have shaken off their fear of the
calendar and until that fear returns we are likely to see
even more higher highs and higher lows. Just remember that
some of the worst sell offs came when the markets were the
most bullish. Keep those seatbelts fastened and those stops
in place.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Bedraggled
Jonathan Levinson

That's how today's relentless range left many traders, still
wondering whether equities are in a distribution top or
consolidation zone.  Treasuries rallied, equities traded mixed,
with the NQ leading to the upside, volatility fell, gold
corrected and precious metals shares rallied.

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




10 minute chart of the US Dollar Index




The US Dollar Index spent the day selling off from an early
morning peak of 99.05, at support at 98.20 as of this writing.
"Anti-disinflation" comments from Ben Bernanke at lunchtime
helped to erase any hopes of a meaningful bounce in the US
Dollar, and while gold recovered only part of its losses, the
precious metals indices rallied from there.  The CRB added
fractional gains, holding the 242 level.

Daily chart of December gold




December gold was lower by 1.30 at 373.70 as of this writing,
printing another intraday low at 370.60, pennies away from
yesterday's low.  The uptrend that carried the contract above its
upper descending pennant trendline now provides support at 368, so
far untested since gold crossed the 370 barrier.  The oscillators
remain in uptrends but appear toppy on this timeframe, and bulls
should be keeping an eye on these downside support levels.
Regardless of the fundamentals, price is the only metric by which
traders are judged.

Daily chart of the ten year note yield




Treasuries were trading firmly prior to Bernanke's speech, and
rallied in its aftermath, with the five year note yield (FVX)
dropping 11.7 bps, the ten (TNX) –8.6 bps to 4.513%, and the
thirty (TYX) down 3.1 bps to 5.32%.  The secondary ascending
trendline under the TNX was not taken out today, and traders must
be wondering where the Fed is going to try to steer them next.
Bernanke's statement that the Fed wants to see low rates for the
foreseeable future seems unequivocal, as central bank market-
related jawboning often is, but the Fed, like the BOJ, tends to
have a short memory once the market has moved in its direction.
We'll continue to follow the charts, which show the oscillators
mixed but no longer suggesting immediate upside.  The horizontal
support lines under the oscillators, and the rising secondary
price trendline are the levels to watch.



Daily NQ candles




The NQ marched to a new 52 week closing high, reversing
yesterday's weakness and leading the other equity futures
significantly.  The preliminary sell signal became a premature
sell signal on the stochastic, which "undrew" itself on today's
gains.  The Macd continues to point straight up, reflecting what
is now 8 days of declines (not counting yesterday's fractional
pullback).

30 minute 20 day chart of the NQ




The 30 minute NQ candles continue to reflect a solid uptrend.
The stochastic downphase lasted slightly longer than its previous
ones, but nevertheless reversed well before becoming oversold
even on this relatively short timeframe.  The action continues to
be bullish within a potentially bearish chart pattern , with
support now at 1365 NQ.  Once again, bulls need to use stops and
bears need to use patience.

Daily ES candles




A dear friend of mine wrote something very funny about the SPX:
"If they can break support at 1027, they could get down to 1026."
That pretty much says it all.  The ES cranked out a new closing
high by closing 1.5 points higher at 1028.50.  The daily candle
reflects indecision in the form of a doji star, but in fact it
was merely listless, aimless rangebound trading between 1021.50
and 1029.50.  The question remains whether it's distribution or
consolidation, and we simply won't know until either the top or
the bottom of this now 2-day old range breaks.


20 day 30 minute chart of the ES




The 30 minute chart of the ES also reveals the truncated
oscillator downphase within what is either a bear wedge, or a
bear flag broken to the upside.  Whatever it is, it feels bearish
to me, but that could simply be the bullish wall of worry
phenomenon at this point.  The reason for my confusion is evident
in the following 150-tick 2 day chart of the ES, which is what I
use intraday for trading purposes:


150 tick chart of the ES




This chart tells a tale of dashed hopes, broken dreams, refuted
suppositions, rejected theories.  It would much easier to wait
for either the top or the bottom to get broken and let the robots
fight it out.


Daily YM candles




Nothing to add on the YM, also closing at a fresh 52 week, up 19
at 9590.


20 day 30 minute chart of the YM




For tomorrow, the prescription remains the same.  Bulls: stop
losses, bears: patience.  As is always the case with rangebound
trading, small moves begin to feel significant, and, like an
impatient batter at the plate, begin reaching for lousy setups,
just wanting to connect.  Don't do it.  As Jesse Livermore said,
one of the distinguishing traits of winners is that, unlike
suckers, they don't feel the need to "go to work" and be active in
the market every day.  Unless you're adept at scalping, be careful
until the current ranges are resolved.


------------------------------------------------------------
VOTED one of "Best Online Brokers" (4 stars)--Barron's
  optionsXpress's "order-entry screens...go far beyond...
   other online broker sites"--Barron's
  8 different online tools for options pricing, strategy, and charting
  Access to options specialists via email, phone or live chat online
  Real-Time Buying Power, Account Balances or Cancels

Go to http://www.optionsxpress.com/marketing.asp?source=oetics22

Note: Options involve risk. Risk disclosure:

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


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

The Bernanke Put
Jonathan Levinson

Ben Bernanke whispered sweet nothings in the markets' ears today,
words of low interest rates for a long time to come.  The promise
of continued easy money gave equities and treasuries a lift, with
the COMPX, INDU and SPX reaching new 52 week closing highs.

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




Daily COMPX candles




There's nothing bearish about a higher close, and that's what we
got today on the COMPX, which added 16 points on 1.8B shares'
Volume.  While the volume failed to keep up with yesterday's 2B+
shares, it was nevertheless a very solid day at what remains an
indecisive area for the markets.  This comment evokes memories of
Spring 2000, in which we had day after day of record closes.
While the 10 day stochastic appeared to be signaling a top
yesterday, it grew more overbought today as the Macd extended its
buy signal further. Points of caution on the daily chart are
limited to upper Bollinger band resistance, although no band
violation has yet occurred.

The more interesting chart is the shorter timeframe 30 minute
candles, which reveal the COMPX in what or may not be an
unhealthy uptrend.  This is to say that the chart pattern appears
to be either a bear flag or a bear wedge, both of which are drawn
below.  These patterns reveal an excess of bullish optimisim, as
traders chase the price higher in an either narrowing (bear
wedge) or constant (bear flag) range.  As Bulkowski observes in
the "Encyclopedia of Chart Patterns", bear wedges in his study
tend to break to the downside 75% of the time.  He current
implied wedge target on a violation of the lower ascending
trendline would be 1740 in this case, if the breakdown plays out
in full.

30 minute 20 day chart of the COMPX






Daily INDU candles




The Dow crept higher as well, underperforming the Nasdaq but
nevertheless closing at a new 52 week high on its 19 point gain.
The closing surge managed to leave the VIX back below 20 on a
closing basis, a level generally associated with market tops.
Like the Nasdaq, the 30 minute chart below reveals a possible
bear wedge formation persisting at upper rising trendline
resistance.  The advance today was sufficient to abort the
downphase on the 300 minute stochastic long before it became
oversold, which confirms the price uptrend.  The two lower
tendlines constitute primary and secondary support on any
pullback, but note that neither has been touched this week.


20 day 30 minute chart of the INDU





Daily OEX candles




The ill-defined cycles caused by months of flat trading appear to
be pulling themselves up into buy signals, as the price continues
to advance.  The 520 level implied by the possible-but-flawed
reverse head and shoulders was not touched today, and as the 30
minute chart below reveals, it will take a significant push above
trendline resistance in order to achieve it.

While fighting an uptrend is not my intent, the 30 minute chart
looks ripe for a corrective pullback as noted in last night's
Index Wrap.  The Macd is not confirming any of this week's
advance, which is a bearish divergence, and the low VIX within
the context of a bearish ascending wedge formation makes a
correction that much more likely.  If, on the other hand, the
upper tendlines in the 517.50 area fail, bears will want to be
out of the way.

20 day 30 minute chart of the OEX




Daily QQQ candles




The QQQ's 4 cent pullback was a distant memory today, with a 43
cent gain to bring the Qubes to a new closing high.  Like for the
Nasdaq, the 10 day stochastic sell signal did not progress and is
in the process of "undrawing" itself as oscillators are often
wont to do.  The upside move is a bear wedge failure, not the
first we've seen this summer but nevertheless surprising. QQQ
closed right at its high of the day, a bullish hammer portending
higher prices at the open.

The 30 minute chart reveals trendline resistance in the 34.45
area within the context of the bear wedge drawn today.  The range
has narrowed to 34.05-34.45, and traders can hope for a break in
one direction or another.  As noted above, the bear wedge implies
that the likelihood is to the downside, but we can let the price
tell us where it wants to go from these up- and downside decision
points.

20 day 30 minute chart of the QQQ





Futures were trading bullishly afterhours following INTC's post-
bell guidance.  Whether this carries through to tomorrow morning
or not remains to be seen.  As daytraders learned again today,
narrow-range chop is unpleasant and tends to benefit only the
broker, reeling in our commissions.  We'll be watching support
and resistance lines for a hopefully tradeable break.  See you at
the bell!


------------------------------------------------------------
We got trailing stops!
  Trade online with trailing stops at optionsXpress, at no extra cost
  Trailing stops based on the option price or the stock price
  Also place Contingent, Stop Loss, and "One Cancels Other" orders
  $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees!

Go to http://www.optionsxpress.com/marketing.asp?source=oetics23

Note: Options involve risk. Risk disclosure:

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


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

Impressive Disbelief
- J. Brown

Once again the morning began with a truckload of positive analyst
comments for the tech sector.  This time the focus was chip
stocks, which helped propel the SOX index to a 2.5% gain.  This
in turn kept the NASDAQ afloat to strike its seventh consecutive
gain in a row.  The NASDAQ Composite was joined by the Russell
2000 and the Wilshire 5000 in this feat of sequential gains.

Bullish investors found the market's ability to maintain its
gains impressive.  On the other hand, bearish traders were left
dumbfounded in disbelief.  One might suspect the berth of this
rally is fading as several major market indices ended the day
down fractionally in the red.  However, the after hours mid-
quarter update from Intel was mildly positive and could set the
markets up to make it eight in a row for the NASDAQ.

We've said it before... several of the major indices and plenty
of individual equities are looking very extended and in need of
some consolidation.  The bullish percent numbers below, with many
at 5-year extremes, support this notion.  Playing the trend is
great but be patient and wait for the right entry point.

We still have a busy economic day tomorrow with nonfarm payrolls,
the unemployment number, hourly earnings all coming out before
the opening bell.


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

Market Averages

DJIA ($INDU)

52-week High:  9609
52-week Low :  7197
Current     :  9587

Moving Averages:
(Simple)

 10-dma: 9410
 50-dma: 9214
200-dma: 8623



S&P 500 ($SPX)

52-week High: 1029
52-week Low :  768
Current     : 1027

Moving Averages:
(Simple)

 10-dma: 1007
 50-dma:  992
200-dma:  922



Nasdaq-100 ($NDX)

52-week High: 1376
52-week Low :  795
Current     : 1373

Moving Averages:
(Simple)

 10-dma: 1332
 50-dma: 1270
200-dma: 1121



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

Unfortunately, it's just more of the same.  The VIX is back under
20 and the VXN has developed a habit of gapping at the open only to
fade into the close.

CBOE Market Volatility Index (VIX) = 19.89 -0.54
Nasdaq Volatility Index (VXN)      = 30.71 -0.28

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.68        676,086       458,851
Equity Only    1.10        554,715       611,450
OEX            1.33         17,836        23,640
QQQ            4.08         24,642       100,559


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

Bullish Percent Data

           Current   Change   Status
NYSE          71.7    + 0     Bull Confirmed
NASDAQ-100    78.0    + 2     Bear Correction
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       80.2    + 1     Bull Confirmed
S&P 100       87.0    + 2     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  1.92
10-Day Arms Index  1.79
21-Day Arms Index  1.45
55-Day Arms Index  1.38


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

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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1551      1768
Decliners    1268      1317

New Highs     222       266
New Lows       10         3

Up Volume    980M     1372M
Down Vol.    786M      493M

Total Vol.  1796M     1877M
M = millions


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

Commitments Of Traders Report: 08/26/03

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 no significant change in the long or short positions
for the large S&P futures contracts.  We continue to see the
commercials or "smart money" inch up their short positions while
retail traders inch up their long positions.  Since they both
tend to take the opposite sides of the market, this is normal.


Commercials   Long      Short      Net     % Of OI
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%)
08/26/03      410,378   472,987   (62,609)   (7.1%)

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
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%
08/26/03      170,424    76,967    93,457    37.8%

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

In contrast we're seeing the commercials add strongly
to their long positions in the e-minis.  The latest reading
shows the most bullish position in a very long time.
Just as expected the small traders has loaded up on short
positions and this marks the strongest net short position
for months.


Commercials   Long      Short      Net     % Of OI
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%
08/26/03      338,766   234,841    103,925    18.1%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  103,925   - 08/26/03

Small Traders Long      Short      Net     % of OI
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%)
08/26/03       52,131   120,853   (

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


NASDAQ-100

Commercials remain net short on the NASDAQ 100 futures
while small traders are still swinging for the fences
with heavy net longs.


Commercials   Long      Short      Net     % of OI
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%)
08/26/03       33,991     55,849   (21,858) (24.3%)

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
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%
08/26/03       26,108     8,864    17,244    49.3%

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

DOW JONES INDUSTRIAL

The flurry of short positions for the DJ Industrials
two weeks ago have mostly evaporated, meanwhile the
small trader has eliminated a few short positions as well.


Commercials   Long      Short      Net     % of OI
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%
08/26/03       24,586    10,386   14,200      40.6%

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
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%
08/26/03       14,115     5,592    8,523     43.2%

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   8,523  -  8/26/03

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


------------------------------------------------------------
Quit paying fees for limit orders or minimum equity
   No hidden fees for limit orders or balances
   $1.50 /contract (10+ contracts) or $14.95 minimum.
   Zero minimum deposit required to open an account
   Free streaming quotes

Go to http://www.optionsxpress.com/marketing.asp?source=oetics24

Note: Options involve risk. Risk disclosure:

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


FREE TRIAL READERS
******************
If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


**********
DISCLAIMER
**********

Please read our disclaimer at:



**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 09-04-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: LLL
Dropped Puts: None
Call Play Updates: CCMP, ERTS, GILD, GS, OMC, PCAR, PGR, SPW, UTX
New Calls Plays: RYL
Put Play Updates: ESRX, XL
New Put Plays: KKD


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

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


CALLS:
*****

L-3 Communications -LLL - close: 49.29 change: -0.86 stop: 49.25

A month is more than enough time for a play to prove itself, and
in that regard, LLL has failed.  We've given the stock plenty of
opportunities to redeem itself and last week's breakout over the
$50.60 level looked like the proof we had been waiting for.  But
once again, there were plenty of sellers waiting just overhead
and they've been leaning heavily on the stock over the past 3
sessions.  Thursday's 1.7% decline was the final straw, as it
clearly negated the recent breakout and then closed below the 20-
dma for the first time since the middle of July.  Also a negative
was the intraday violation of our stop, and weak rebound from the
intraday lows was not enough to dissuade us from pulling the
plug.  There are clearly better bullish plays out there and it's
time to let this non-performer go.

Picked on August 3rd at    $49.90
Change since picked:        -0.61
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      904 K
Chart =



PUTS:
*****

None


------------------------------------------------------------
WINNER of Forbes Best of the Web Award
  optionsXpress voted Favorite Options Site by Forbes
  Easy screens for spreads, collars, or covered calls
  Free streaming quotes
  Real-time option chains, charts + calculators

Go to http://www.optionsxpress.com/marketing.asp?source=oetics21

Note: Options involve risk. Risk disclosure:

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


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

Cabot Microelect. - CCMP - cls: 66.15 chng: -0.13 stop:
63.50*new*

It has been an interesting week for our CCMP play, as the stock
has alternated days of strength with the Semiconductor index
(SOX.X).  Thursday's 2.5% advance in the SOX was unable to
motivate the buyers in CCMP, as the stock slipped fractionally
lower by the close.  Despite that lackluster performance, CCMP is
still solidly within it rising channel, the bottom of which is
now at $64.25, just above the 20-dma ($64.17).  An intraday
pullback near that level can be used for initiating new
positions, but only if the pullback is followed by the expected
rebound from the bottom of the channel.  Trying to game new
entries on a breakout move is clearly fraught with peril, as
demonstrated by the dismal failure of the intraday moves over
$66.50 the past two days.  Buy the dips if offered and keep those
stops in place. Note that our coverage stop rises to $63.50
tonight, which is below both the bottom of the channel and the
20-dma.

Picked on August 27th at    $64.45
Change since picked:         +1.70
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =       824 K
Chart =


---

Electronic Arts - ERTS - close: 90.15 chg: -0.97 stop: 85.75

Both ERTS and the GSO software index have been on a non-stop
rally higher from August 11th with only a three-day pause to
catch its breath late in August.  Both are at one-year highs and
both took a breather today after this week's gains.  The pull
back to the $90 level in ERTS looks like an entry point for bulls
but if the market slips further on Friday we'd wait for a dip
towards the $88.00-88.50 mark.  A bounce near $88.50 would be a
more enviable entry point.  There was an article by Reuters
yesterday morning regarding the conflicting analyst comments on
ERTS recently.  RBC Capital Markets had raised earning estimates
and price target on ERTS based on strong game sales.  On the
other hand, Wedbush Morgan felt that ERTS was already fairly
valued and lowered its rating. One concern by the Wedbush analyst
was the recent insider selling.  It looks like the markets are
ignoring Wedbush's comments with this week's daily upgrade of the
software sector in general.

Picked on August 28 at $89.06
Change since picked:    +1.09
Earnings Date        07/23/03 (confirmed)
Average Daily Volume:     3.3 million
Chart =


---

Gilead Sciences - GILD - cls: 67.33 chg: +1.70 stop: 62.99

Good news biotech fans, the rally is still alive.  We were pretty
encouraged on Tuesday when the BTK biotech index broke out above
its descending trendline of lower highs.  Wednesday gave us pause
for concern when there was no follow through in the BTK and
shares of GILD took a dive back to its 10-dma.  Thankfully, the
momentum returned to both the BTK and GILD on Thursday.  The
BTK's close above the 470 resistance level is good news and
should help pave the way for GILD to retest its own resistance
near $70.00.  The bullish MACD and other oscillators for GILD
look good.  More conservative traders can probably use a tighter
stop than ours.  We might suggest yesterday's low or the 50-dma.

Picked on August 19 at $65.32
Change since picked:    +2.01
Earnings Date        07/31/03 (confirmed)
Average Daily Volume:    3.31 million
Chart =


---

Goldman Sachs Grp. - GS - cls: 91.26 chng: +0.44 stop: 87.50*new*

As the Broker/Dealer index (XBD.X) has continued to rise
throughout the week, so has our bullish play on GS, rising right
to the $91.50 resistance level on Thursday, as the XBD reached
the key $600 level.  Buying volume has continued to hold near the
levels seen on Tuesday's breakout, although still below the ADV.
Keeping a lid on the price advance is the upper Bollinger band
(now at $91.14), but it is encouraging to see nary a hint of a
pullback from this rising measure of resistance.  We still favor
a pullback entry, now in the $89-90 area, as a rebound in that
area would confirm that old resistance is acting as newfound
support.  But with the very real possibility of a breakout over
the June highs, aggressive traders can consider new entries on a
move over $92, but only if the XBD index continues to advance
above $600.  This week's bullish action is pulling the moving
averages higher and the 20-dma ($87.71) should now be strong
support.  So we're raising our stop to $87.50, as a break below
that level would spell serious problems for the bulls.

Picked on September 2nd at  $90.45
Change since picked:         +0.81
Earnings Date              9/24/03 (unconfirmed)
Average Daily Volume =    3.85 mln
Chart =


---

Omnicom Group - OMC - close: 80.36 chg: +0.34 stop: 75.75

We don't have a lot of new things to say about OMC since Tuesday
as the stock has traded within a $1 range for the last two
sessions.  This is actually good news since it shows a lack of
sellers after the recent rally.  We are still suggesting that
short-term traders who took advantage of the dip to $75 consider
selling part of their positions to lock in some profits.
However, traders looking for new positions might want to wait and
see if a market dip can push OMC lower.  A bounce from $79 or $78
might look good.  Our next upside target remains at $85.

Picked on August 19 at $76.67
Change since picked:    +3.69
Earnings Date        07/29/03 (confirmed)
Average Daily Volume:     881 thousand
Chart =


---

PACCAR - PCAR - close: 86.54 change: +0.73 stop: 82.45

The auto & auto parts industry were hot in August but this week's
laser beam focus on technology stocks has stolen some of the wind
out of PCAR's sails.  The good news is that this has allowed
traders several chances to time entries near the $85 level in
PCAR.  But the skeptic in us worries about the big volume and
little gain the last three sessions.  Could big shareholders be
distributing stock and cashing in gains?  Or is it just normal
volume now that Wall Street is fully staffed again?  As long as
PCAR remains above $85.00 we're not going to worry about it.

Picked on August 31 at $85.37
Change since picked:    +1.17
Earnings Date        07/24/03 (confirmed)
Average Daily Volume:    1.15 million
Chart =


---

Progressive Corp. - PGR - cls: 72.88 chng: +0.46 stop: 70.00*new*

It's hard to find fault with our PGR play, as all is proceeding
according to plan.  The breakout from the 2-week consolidation
near $70 has seen the stock rise steadily each day this week and
the stock is closing in on the first notable resistance at
$73.50.  The first test of that level (possibly on Friday) may be
the impetus for some profit taking and so long as the dip is
mild, it may provide the setup for initiating new positions.
Look for a dip and rebound in the $70.50-71.50 area as a
potential entry point, with $71.75 (the 62% retrace of the June
through August swoon) being a likely bounce point.  While initial
resistance is found near $73.50, we're still targeting a rise
into the $75-76 area as a recommended exit point from the play,
as that is the bullish price objective from the breakout of that
horizontal consolidation near $69-70.  Raise stops to $70, as any
pullback that extends that low would send a clear signal that the
bullish move is over.

Picked on August 31st at    $70.74
Change since picked:         +2.14
Earnings Date             10/15/03 (unconfirmed)
Average Daily Volume =       789 K
Chart =


---

SPX Corp. - SPW - close: 49.90 change: +0.10 stop: 47.50

It is hard to get overly excited about our SPW play here, as it
continues to vacillate about the $50 level, but there are some
encouraging signs.  The pattern of higher lows and higher highs
remains intact and it was nice to see the breakout earlier in the
week above that level, even if the bulls have been unable to
follow through on that achievement.  We knew the $50 resistance
was going to be a tough nut to crack and so we'll just do our
best to exercise the necessary patience as we wait for the next
bullish move.  The stock continues to find support at its
ascending trendline (currently $48.75), backed up by the 20-dma
($48.20) and since buying the dips has been working so far, we'll
stick with that strategy.  Traders still looking for an entry
into the play should look for an intraday dip into the $48.50-
48.75 area, with an eye towards the next upward leg taking SPW to
the $53 resistance area, where conservative traders can look to
book some gains.  For now, we're keeping our stop at $47.50.

Picked on August 14th at    $48.14
Change since picked:         +1.75
Earnings Date             10/27/03 (unconfirmed)
Average Daily Volume =       880 K
Chart =


---

United Technologies - UTX - cls: 79.48 chg: -0.22 stop: 75.99

Shares of UTX have been a little quiet.  Sometimes that's okay
but with the markets in rally mode we would have expected more
participation from a Dow Jones component like UTX.  We suspect
that UTX is suffering from the same stolen wind in the sales that
PCAR is.  Everyone's focus has been tech stocks so the last three
sessions has left UTX in limbo.  As a matter of fact this entire
week has been in a tight range of less than $2.  If we squint
really hard the optimist in us thinks that might be a bull flag
on the intraday chart.  Should we see a market dip then look for
a bounce from the $78 level as an entry point for new bullish
positions, or momentum traders can look for a new high over $80.

Picked on August 29 at $80.05
Change since picked:    -0.58
Earnings Date        07/17/03 (confirmed)
Average Daily Volume:     2.1 million
Chart =



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

The Ryland Group - RYL - close: 72.18 change: +2.42 stop: 66.75

Company Description:
The Ryland Group is a homebuilder and mortgage-finance company
that has built more than 175,000 homes.  Additionally, the Ryland
Mortgage Company (RMC) has provided mortgage financing and
related services for more than 155,000 homebuyers. Currently,
Ryland homes are available in more than 260 communities in 21
markets across the United States.

Why we like it:
Despite the sharp rise in bond yields since the June lows,
Housing Starts and Home Sales continue to be strong, at or near
record levels.  Continued "doveish" comments from various Fed
heads about interest rates seems to be injecting new life into
this key sector of the market and the Home Construction index
($DJUSHB) tacked on nearly 2% on Thursday to close at its best
level since June 19th.  Taken together with the rally from the
early August lows near $405, the index is up 14.5% in just over a
month.  Today's close over the $462 resistance clears the last
obstacle for the bulls before a retest of the June highs near
$482.  RYL has been one of the strongest performers in the sector
and is tracking very well with the bullish action in the $DJUSHB.
After building a bullish triangle throughout the month of August,
the stock broke above the top of that formation yesterday,
gaining 3.6% and breaking out above the 50-dma (currently
$68.77).  Thursday's session saw more bullish action, with the
stock gaining another 3.46% on above average volume and the stock
looks poised to challenge its June and July highs in the $77-78
area.

The stock is looking strong on the PnF chart as well, with this
week's bullish action generating a new Buy signal and a bullish
price target of $91.  Thursday's gains puts RYL well above its
upper Bollinger band ($70.49), so momentum traders will need to
tread very carefully if opting to chase the stock higher.  The
better entry point appears to be on a pullback into the $69-70
area.  However, if history repeats, we may not get lucky enough
to see such a pullback.  A quick look at the trading pattern from
late May through early June shows that the stock rode its upper
Bollinger band higher for 9 consecutive sessions and a gain of
more than $10 before a brief pullback and final surge over $75.
So while waiting for a pullback makes for a more favorable entry,
we must concede that the more aggressive approach of buying into
further strength may be the only way to climb aboard this latest
bullish breakout in the stock.  Owing to the aggressive nature of
the play, we're going to have to use a wider stop than normal and
we're initially placing it at $66.75, just below the 20-dma
($66.77) which provided solid support for this launch out of the
bullish triangle pattern.  Traders that enter the play on further
strength may want to consider a tighter stop at $68, which is
just below today's intraday high, as well as the 50-dma.

Suggested Options:
Shorter Term: The September 70 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the
money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 75 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 70 Call.

BUY CALL SEP-70 RYL-IN OI= 916 at $3.60 SL=1.75
BUY CALL SEP-75 RYL-IO OI= 222 at $1.05 SL=0.50
BUY CALL OCT-70 RYL-JN OI= 987 at $5.10 SL=3.00
BUY CALL OCT-75 RYL-JO OI=1494 at $2.65 SL=1.25

Annotated Chart of RYL:




Picked on September 4th at  $72.18
Change since picked:         +0.00
Earnings Date             10/21/03 (unconfirmed)
Average Daily Volume =       999 K
Chart =



------------------------------------------------------------
 optionsXpress has "...a lot of bang for the buck."--Barron's

  $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees
  Easy screens for spreads, collars, or covered calls!
  Contingent, Stop Loss, Trailing stop, or OCO
  8 different online tools for options pricing, strategy, and charting

Go to http://www.optionsxpress.com/marketing.asp?source=oetics25

Note: Options involve risk. Risk disclosure:

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


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

Express Scripts - ESRX - cls: 60.83 chng: +0.11 stop: 63.25*new*

We sure were handed a nice reprieve in our ESRX play!  After
selling off in late August, the stock put in a higher low, and
rebounded right back to the $65 level and as of Tuesday, we were
concerned about being stopped out.  But then along came
yesterday's sharp selloff on strong volume (more than double the
ADV).  But then along came the bulls to defend support near the
$60 level today, on equally strong volume.  What's a bear to do?
For one thing, tighten the stop to at least break even, and
that's the most constructive action we can take tonight, lowering
our stop to $63.25.  It isn't necessarily a technically
significant level, but at least we won't let a paper gain turn
into a real loss.  Traders concerned about a rebound from current
levels may just want to close the play here for a modest gain.
We're going to stick with it on the thought that there's another
leg down to be had, probably to the 200-dma ($58.66) and possibly
to the next major support near $56.50.  Note that yesterday's
selloff generated a continuation PnF Sell signal and that keeps
things aligned in the bears' favor.  Based on the strong buying
volume seen on Thursday, we're not recommending new positions
right now, as we'd prefer to see if there is any life to this
bounce before committing fresh capital to the play.

Picked on August 24th at   $63.48
Change since picked:        -2.65
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =   1.38 mln
Chart =


---

XL Capital Ltd. - XL - close: 76.15 change: +0.48 stop:
77.10*new*

It certainly is irritating to see promising plays stagnate and
that is clearly the case with XL.  After giving a convincing
breakdown under $75 early last week, the stock has been steadily
(if slowly) advancing higher and has been pinging about the $76
level for the past three sessions, unable to break out or break
down.  We've reached what should be the inflection point, as the
stock is pressing against the descending trendline from the June
highs ($76.35), with additional resistance provided by the 20-dma
($76.78).  At the same time, daily Stochastics (5,3,3) have
worked their way into overbought territory and are starting to
look ripe for a rollover.  But yet, price holds firm near $76.
The rise of the past 8 sessions certainly looks like a bear flag
pattern and if there is to be a rollover, then here is the point
at which aggressive traders will want to initiate new bearish
positions.  The more conservative strategy will be to wait for a
break under the bottom of the bear flag pattern at $75.85,
preferably on rising volume.  As XL can clearly go either way at
this point, we're methodically reducing our risk in the play,
lowering our stop to $77.10 tonight, which is still just above
the 30-dma ($77.08), which XL has not been able to touch since
early July.

Picked on August 21st at   $75.92
Change since picked:        +0.23
Earnings Date            10/30/03 (unconfirmed)
Average Daily Volume =      823 K
Chart =



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

Express Scripts - ESRX - cls: 60.83 chng: +0.11 stop: 63.25*new*

We sure were handed a nice reprieve in our ESRX play!  After
selling off in late August, the stock put in a higher low, and
rebounded right back to the $65 level and as of Tuesday, we were
concerned about being stopped out.  But then along came
yesterday's sharp selloff on strong volume (more than double the
ADV).  But then along came the bulls to defend support near the
$60 level today, on equally strong volume.  What's a bear to do?
For one thing, tighten the stop to at least break even, and
that's the most constructive action we can take tonight, lowering
our stop to $63.25.  It isn't necessarily a technically
significant level, but at least we won't let a paper gain turn
into a real loss.  Traders concerned about a rebound from current
levels may just want to close the play here for a modest gain.
We're going to stick with it on the thought that there's another
leg down to be had, probably to the 200-dma ($58.66) and possibly
to the next major support near $56.50.  Note that yesterday's
selloff generated a continuation PnF Sell signal and that keeps
things aligned in the bears' favor.  Based on the strong buying
volume seen on Thursday, we're not recommending new positions
right now, as we'd prefer to see if there is any life to this
bounce before committing fresh capital to the play.

Picked on August 24th at   $63.48
Change since picked:        -2.65
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =   1.38 mln
Chart =


---

XL Capital Ltd. - XL - close: 76.15 change: +0.48 stop:
77.10*new*

It certainly is irritating to see promising plays stagnate and
that is clearly the case with XL.  After giving a convincing
breakdown under $75 early last week, the stock has been steadily
(if slowly) advancing higher and has been pinging about the $76
level for the past three sessions, unable to break out or break
down.  We've reached what should be the inflection point, as the
stock is pressing against the descending trendline from the June
highs ($76.35), with additional resistance provided by the 20-dma
($76.78).  At the same time, daily Stochastics (5,3,3) have
worked their way into overbought territory and are starting to
look ripe for a rollover.  But yet, price holds firm near $76.
The rise of the past 8 sessions certainly looks like a bear flag
pattern and if there is to be a rollover, then here is the point
at which aggressive traders will want to initiate new bearish
positions.  The more conservative strategy will be to wait for a
break under the bottom of the bear flag pattern at $75.85,
preferably on rising volume.  As XL can clearly go either way at
this point, we're methodically reducing our risk in the play,
lowering our stop to $77.10 tonight, which is still just above
the 30-dma ($77.08), which XL has not been able to touch since
early July.

Picked on August 21st at   $75.92
Change since picked:        +0.23
Earnings Date            10/30/03 (unconfirmed)
Average Daily Volume =      823 K
Chart =



------------------------------------------------------------
WINNER of Forbes Best of the Web Award
  optionsXpress voted Favorite Options Site by Forbes
  Easy screens for spreads, collars, or covered calls
  Free streaming quotes
  Real-time option chains, charts + calculators

Go to http://www.optionsxpress.com/marketing.asp?source=oetics21

Note: Options involve risk. Risk disclosure:

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


**********
DISCLAIMER
**********

Please read our disclaimer at:



**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 09-04-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - RYL
Traders Corner: "Living Proof" That We're On The Right Track


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

The Ryland Group - RYL - close: 72.18 change: +2.42 stop: 66.75

Company Description:
The Ryland Group is a homebuilder and mortgage-finance company
that has built more than 175,000 homes.  Additionally, the Ryland
Mortgage Company (RMC) has provided mortgage financing and
related services for more than 155,000 homebuyers. Currently,
Ryland homes are available in more than 260 communities in 21
markets across the United States.

Why we like it:
Despite the sharp rise in bond yields since the June lows,
Housing Starts and Home Sales continue to be strong, at or near
record levels.  Continued "doveish" comments from various Fed
heads about interest rates seems to be injecting new life into
this key sector of the market and the Home Construction index
($DJUSHB) tacked on nearly 2% on Thursday to close at its best
level since June 19th.  Taken together with the rally from the
early August lows near $405, the index is up 14.5% in just over a
month.  Today's close over the $462 resistance clears the last
obstacle for the bulls before a retest of the June highs near
$482.  RYL has been one of the strongest performers in the sector
and is tracking very well with the bullish action in the $DJUSHB.
After building a bullish triangle throughout the month of August,
the stock broke above the top of that formation yesterday,
gaining 3.6% and breaking out above the 50-dma (currently
$68.77).  Thursday's session saw more bullish action, with the
stock gaining another 3.46% on above average volume and the stock
looks poised to challenge its June and July highs in the $77-78
area.

The stock is looking strong on the PnF chart as well, with this
week's bullish action generating a new Buy signal and a bullish
price target of $91.  Thursday's gains puts RYL well above its
upper Bollinger band ($70.49), so momentum traders will need to
tread very carefully if opting to chase the stock higher.  The
better entry point appears to be on a pullback into the $69-70
area.  However, if history repeats, we may not get lucky enough
to see such a pullback.  A quick look at the trading pattern from
late May through early June shows that the stock rode its upper
Bollinger band higher for 9 consecutive sessions and a gain of
more than $10 before a brief pullback and final surge over $75.
So while waiting for a pullback makes for a more favorable entry,
we must concede that the more aggressive approach of buying into
further strength may be the only way to climb aboard this latest
bullish breakout in the stock.  Owing to the aggressive nature of
the play, we're going to have to use a wider stop than normal and
we're initially placing it at $66.75, just below the 20-dma
($66.77) which provided solid support for this launch out of the
bullish triangle pattern.  Traders that enter the play on further
strength may want to consider a tighter stop at $68, which is
just below today's intraday high, as well as the 50-dma.

Suggested Options:
Shorter Term: The September 70 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the
money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 75 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 70 Call.

BUY CALL SEP-70 RYL-IN OI= 916 at $3.60 SL=1.75
BUY CALL SEP-75 RYL-IO OI= 222 at $1.05 SL=0.50
BUY CALL OCT-70 RYL-JN OI= 987 at $5.10 SL=3.00
BUY CALL OCT-75 RYL-JO OI=1494 at $2.65 SL=1.25

Annotated Chart of RYL:




Picked on September 4th at  $72.18
Change since picked:         +0.00
Earnings Date             10/21/03 (unconfirmed)
Average Daily Volume =       999 K



------------------------------------------------------------
VOTED one of "Best Online Brokers" (4 stars)--Barron's
  optionsXpress's "order-entry screens...go far beyond...
   other online broker sites"--Barron's
  8 different online tools for options pricing, strategy, and charting
  Access to options specialists via email, phone or live chat online
  Real-Time Buying Power, Account Balances or Cancels

Go to http://www.optionsxpress.com/marketing.asp?source=oetics22

Note: Options involve risk. Risk disclosure:

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


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

"Living Proof" That We're On The Right Track
By Mike Parnos, Investing With Attitude - and pepperoni!

AHA!!  The couch potato lifestyle rules!  It's time to throw away
those vitamins, ankle weights and health magazines.  No more
Richard Simmons,  Billy Banks or Dr. Atkins. The good news is
that, apparently, pizza can protect you from cancer!

A recent study published in the International Journal of Cancer
has found that a simple thin-crust pizza -- olive oil, tomato
sauce, with mozzarella -- helps protect you against cancer.

"We found that regular pizza eaters had 34% less risk of oral
cavity and pharyngeal cancer, 59% less risk of esophageal cancer,
and 25% less risk of colon cancer.  In this group of patients,
pizza also reduced risk of rectal cancer and laryngeal cancer,"
the study reported.

Stay Tuned
That covers the face, the mouth, the throat and where the "sun
don't shine." Who knows what other important body parts may, in
the future, prove to benefit from our "eating habits"?  It's much
like the rest of life.  If you get enough opinions, sooner or
later you're going to hear one you like.  Just be careful whom you
ask.
________________________________________________________________

You Can't Escape The Option Chains -- Continued
An important aspect of detecting a potential trend or bias in an
option chain is, to note the open interest on the day of the
unusual activity.  Then check again the open interest again the
following day.  If a similar number of contracts disappear from
the open interest figure, you can deduce that the unusual activity
was a closing trade rather than opening a new position.

We have a source of facts in the option chain (free on
www.cboe.com) –  pieces of the puzzle.  Here is an example we used
in the past (last year) to demonstrate the potential predictive
value of using option chains in very short term stock movement.

Find the largest concentration of open interest.  GILD (Gilead
Sciences) was at $33.   The chart told us that it had been in a
trading range between $28 and $38 for months.  GILD is a biotech
stock that has held up relatively well during the recent market
chaos.
September $30 calls = 3,200 OI     $30 puts = 2,200 OI
September $35 calls = 5,200 OI      $35 puts =    470 OI
September $40 calls = 3,200 OI      $40 puts =    450 OI
What did this tell you about the direction of GILD for the
following week and a half?
a) GILD will likely stay in the $30-$40 trading range.  But more
likely, it will stay between $30 and $35.  Let’s figure out what
scenario will most benefit the market makers?

If GILD finishes at $35, a total of 5,670 (calls + puts) will
expire worthless and generate hundreds of additional transactions.
Take note that the total of $30 puts and calls is about the same
(5,400).

The market maker would rather GILD finish at $30.  The same total
number of contracts are at the $30 and $35 strikes.  But there is
one significant difference.  If GILD finishes at $35, the 3,200
$30 strike call contracts will still have a value of $5.00.  If
GILD finishes at $30, the 5,200 $35 contracts will expire
worthless.

If at all possible, the market makers will guide GILD toward the
lower $30 strike.  However, if the market is strong, they may try
to guide it upward to the $35 level.

With this information, what strategies would best take advantage
of this scenario?  A Sept. sell strangle?  A Sept. iron condor?
Perhaps you believe the GILD will stay within the range for
another month and are considering Oct. strangles or condors.
Check the option chain.  At that time, the Oct. $40 calls have the
largest open interest.  It’s not unusual for a biotech stock to
have traders speculate on an FDA approval or rejection.
_____________________________________________________________

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

September Position #1 – SPX Iron Condor – SPX @ 1027.97
S & P 500 Index = SPX
We sold 10 contracts of SPX 1040 Sept. calls and bought 10
contracts of SPX 1050 Sept. calls for a net credit.  Then we sold
10 contracts of the SPX 950 Sept. puts and bought 10 contracts of
the SPX Sept. 940 puts.  Our net credit was $2.70 (a total credit
of $2,700).  We have a huge maximum profit range of 950 to 1040.
More aggressive investors may have narrowed the range a bit and
take in more money.   At 1027.97, the SPX has moved up.  We still
have a bit of a cushion and it's time for a pullback, so we'll
keep the faith – at least for now.

Position Activity!
September Position #2 – COF Sell Straddle – COF @ $ 53.76
Capitol One Financial = COF
We sold 10 contracts of COF Sept. $50 calls @ $2.35 and also sold
10 contracts of COT Sept. $50 puts @ $2.50 for a 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.

A lot can happen in five weeks of exposure to market movement.  On
Tuesday (Sept. 2), COF continued its uptrend – through our bailout
point of $54.85.  When COF hit out exit point, we bought back the
short September $50 calls for $5.40 ($5,400).   Since we had taken
in premium of $4,850, we incurred a loss of only $550.  This is a
necessary money management move to make sure we live to trade
another day.  COF backed off and is now back in the profit range
(for those who still hold the position).  However, we had to
adhere to our plan.  It's the only way to survive.

September Position #3 – HPQ (Hewlett Packard) Bear Put Spread –
(Replacement) – HPQ at $20.78.
HPQ is weak and may return to the $15 range.  So, we bought 10
contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10
contracts of the HPQ 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.  This is a long term position.

September Position #4 (Replacement) – OEX – Bearish Calendar
Spread – OEX @ $516.18
Maybe it's time for the market to return to reality.  Let's see if
we can take advantage of this with a calendar spread.  We bought 8
contracts of OEX November 470 puts @ $10.60 and sold 8 contracts
of OEX September 470 puts @ $2.20 for a 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 fruition.  It's a
directional bet, but with a limited risk as we get paid while we
wait.

EBAY-ING At The Moon
There are some CPTI readers who entered the EBAY position
discussed at the beginning of the month when EBY was trading at
about $103.  Since then, a lot has happened.  EBAY, as you know,
gapped up enough to discourage our participation in the position.
Then, the stock split two-for-one.  Ten contracts of the $110/$115
bear call spread became 20 contracts of the $55/$57.50 bear call
spread.

As I suspected, EBAY got well ahead of itself.  Despite the market
moving up, EBAY has pulled back and finished today at $53.63 –
within our max profit range.   We still have two weeks remaining,
but those still in this trade are not in a bad place.
______________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational 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" on
the OI home page 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


------------------------------------------------------------
We got trailing stops!
  Trade online with trailing stops at optionsXpress, at no extra cost
  Trailing stops based on the option price or the stock price
  Also place Contingent, Stop Loss, and "One Cancels Other" orders
  $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees!

Go to http://www.optionsxpress.com/marketing.asp?source=oetics23

Note: Options involve risk. Risk disclosure:

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


**********
DISCLAIMER
**********

Please read our disclaimer at:



**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives