Option Investor

Daily Newsletter, Monday, 09/22/2003

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The Option Investor Newsletter                   Monday 09-22-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Drop in Dollar Dominos
Futures Wrap: Unfilled Gaps
Index Trader Wrap: See Note

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
     09-22-2003            High     Low     Volume Advance/Decline
DJIA     9535.41 -109.41  9641.87  9501.72 1.52 bln    787/2026
NASDAQ   1847.62 - 31.08  1881.42  1866.88 1.69 bln   1050/2050
S&P 100   513.31 -  7.31   520.62   510.95   Totals   1837/4076
S&P 500  1022.82 - 13.48  1036.30  1018.30
RUS 2000  513.65 -  6.55   520.20   511.65
DJ TRANS 2779.18 - 15.53  2792.96  2757.67
VIX        19.65 +  0.58    23.90    19.03
VXN        27.94 -  1.80    28.39    27.52
Total Volume 3,636M
Total UpVol    771M
Total DnVol  2,788M
52wk Highs     468
52wk Lows       17
TRIN          1.59
PUT/CALL      0.75

Drop in Dollar Dominos
by James Brown

A drop in the U.S. dollar cascaded across the global market place
after the G7 finance ministers released a statement supporting
flexible exchange rates.  The U.S. dollar fell to three-year low
against the Japanese yen and a fresh two-month low against the
Euro.  World indices responded negatively to the news as anyone
who exported to the U.S. suddenly found their products more
expensive.  American indices, which had been near new one-year
highs, suffered losses as investors used the G7 news as an excuse
to take profits.

The G7 summit included finance ministers from the U.S., Japan,
Germany, Italy, Britain, France and Canada.  The meeting was held
in Dubai, United Arab Emirates and together the seven expressed
their unhappiness with countries or markets that tried to
manipulate their currency to the favor of exporters.  Okay, it
was probably just six expressing their concerns and Japan told
them what they wanted to hear.  While no one country was named
specifically, the message was clearly focused on Japan and China
who have been devaluing their currencies to keep them weak
against the US dollar and thus keep their exports competitive in
the U.S. market place.

The Bank of Japan is famous for selling yen and/or buying dollars
to keep their currency weak.  This year economists estimate the
BoJ has already sold somewhere near $100 billion (more than $11
trillion yen) through the month of September to keep their
exports competitive and the yen weak.  Unfortunately for Japanese
businesses the reaction to the G7 statements was rapid.  The yen
rose to a high of 111.39 against the dollar from Friday's 114.
Japan, the second biggest economy on the planet, has been trying
to pull out of a 12-year slump and the rising yen is not going to
help.  The NIKKEI 225 average, which hit a fresh 15-month high
last week, dropped more than 460 points or 4.2% to 10,475 as
investors sold Japanese stocks on fears the stronger yen would
slash corporate profits.  It was the largest one-day loss for the
NIKKEI in two years.  To put it in perspective, it's been
estimated that Toyota Motor Corp (NYSE:TM) losses 20 billion yen
in operating profits for every 1 yen in decline against the

Concerns over Japan's traditional currency plays were also felt
here at home in the bond markets.  Japan is the largest foreign
holder of U.S. Treasuries and demand for U.S. notes should
slacken if Japan is going to let the yen float.  The weakness in
the dollar also compounded the threat to U.S. equities.  As the
dollar weakens the value of U.S. investments held by foreigners
also slips.  We've had an incredible run up this year and further
weakness on the horizon for the dollar could spark international
fund managers to lock in some profits in their U.S. investments.
This could be a new headwind for stocks as speculation is already
suggesting the dollar might fall to 103 against the yen while the
euro could climb to $1.30 by the end of 2004.

Following the drop in the Japanese markets, the Hang Seng lost 95
points to 10,873.  The British FTSE 100 dropped 28.8 to 4,228 and
the German DAX 30 plummeted 3.4% to 3,456.  The Dow Jones
Industrials fell 109 to 9535.  The NASDAQ Composite lost 31
(1.6%) to 1874 and the S&P 500 index fell 1.3% to 1022.  The
broadest market index, the Wilshire 5000 lost 126 points, falling
back below the 10K mark to 9927.  The selling was very wide
spread with only two major sector indices in the green.  Closing
positive was the XNG natural gas index, up 1/3 of a point to 195
and the XAU gold and silver index, up 1.3% to 96.93.  The
strength in the XAU was powered by a $5 jump in December gold
futures to $388 as some investors sought safety in the shiny
metal against the slipping U.S. greenback.

As would be expected market internals were horrible.  Declining
stocks beat advancing issues 20 to 7 on the NYSE and 2 to 1 on
the NASDAQ.  Down volume swamped up volume by 4 to 1 on the NYSE
and 3.6 to 1 on the NASDAQ.  Normally when the markets decline
the VIX or volatility index advances.  That's exactly what
happened today with a 3 percent jump in the VIX to 19.65.
However, what makes today's move significant is that today is the
first day of trading for the "new" VIX based on option prices in
the S&P 500 index instead of the S&P 100 index.  Those traders
who would like to continue to follow volatility moves using the
old calculations can do so using the new symbol VXO.

Chart of the Industrials:

Chart of the NASDAQ:

One of the biggest stories today, behind the G7 announcement, was
news from Motorola (NYSE:MOT).  After six years as the CEO of
Motorola, Christopher Galvin, grandson of the company's founder,
resigned after a conflict with the board of directors.  The stock
market welcomed the news with an 8.74% gain in the stock price
and a wave of analyst upgrades.  Critics had been harsh on Galvin
after MOT's stock price lost nearly half its market value during
his reign and Motorola, once the king of mobile phone handset
production, fell behind Nokia.

Other than the G7 news and the Motorola shake up most of Monday's
session felt pretty quiet.  Of course it's tough to have a Monday
without new M&A activity and today was no exception.
InterActiveCorp (IACI), previously known as USA Interactive, has
added yet another dotcom to its stable.  The house that Barry
Diller is building now includes HotWire.com, the discount
travel/lodging website.  The acquisition is said to cost upwards
of $665 million in cash and the assumption of $20 million in
options and warrants.  HotWire.com now shares the IACI umbrella
with Expedia.com, Hotels.com, TicketMaster(.com), Match.com,
CitySearch(.com), LendingTree.com and the HomeShoppingNetwork.

Jim's wrap over the weekend seemed rather appropriate.  Was
Friday's session just the calm before the storm?  Is the reaction
to the G7 statement merely the first flash of lightening before
it starts to rain or will buyers step in to by the dip yet again?
There were plenty of comments over the dollar today.  Most
believe that a weaker dollar should actually be beneficial to the
U.S. economy in the long run as it makes U.S. products more
competitive overseas.  However, part of the concern is how fast
will the reaction be.  If the dollar spirals out of control it
could throw the markets into a panic with global repercussions.
The general attitude is that the dollar should see more weakness
near term.  Plus, the new consensus for flexible exchanges rates
is going to put a lot more pressure on Asia and Europe to
generate stronger domestic growth.

Jim and I both mentioned over the weekend that we've just stepped
into the most dangerous time of the year.  It's traditionally the
weakest period for the equity markets as bears try and gorge
themselves in a fall feeding frenzy before hibernating during the
Q4 holiday shopping season.  The markets have been less than kind
to the bears so they should be starving and willing to bite at
anything that starts to stumble.  At least one analyst told the
financial media today that some investors may want to move to the

Tomorrow will be day without major economic news and traders will
be reacting to earnings news and upgrades/downgrades.  Headlining
the earnings reports tomorrow are three of Wall Street's biggest
brokers.  Goldman Sachs (GS) is estimated to turn in $1.22 a
share, up from $1.00 last year.  Lehman Brothers (LEH) is
expected to earn $1.35, up from $0.70 last year.  Morgan Stanley
(MWD) is estimated to earn $0.69, up from $0.55 last year.
Expectations could be high after last week's major blow out by
Bear Stearns (BSC).  The XBD broker-dealer index has been hitting
new two-year highs and investors are expecting results to back up
these gains.

While not market-moving news, the media will also be reporting on
the OPEC meeting tomorrow as well as President Bush's address to
the U.N. concerning Iraq.

Keep an eye on those stop losses.


Unfilled Gaps
Jonathan Levinson

Today saw a gap down in the US Dollar Index, a gap up in treasury
yields and gold, and gaps down in the S&P, Nasdaq and Dow
futures.  None of these gaps were filled.

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

Note regarding pivot matrix:  The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula.  They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm.  Do not think of them them as market "calls"
or predictions.  Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions.  Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.

15 minute chart of the US Dollar Index

The US Dollar Index continued its losing streak, getting croaked
on an unfilled breakaway gap last night and unable to bounce
today, spending most of the session below 94.  US dollar
denominated commodities benefited, with the CRB and precious
metals gaining on the day.

Daily chart of December gold

If you squint at the chart, you can see a gap up open on December
gold, corresponding to the gap down on the US Dollar Index.  YG3Z
hit an intraday high of 388.80 and never went below 385, closing
higher by 5.60 at 388.50.  It was also an impressive day for the
miners, with the HUI up 3.44 to 207.94 and the XAU +1.25 to
96.63.  The CRB rose 1.49 to close at 239.98 led by coffee, sugar
and soybean futures.  The daily chart oscillators are on bullish
kisses here, and goldbugs can hope for the upper bear wedge
trendline to get taken out to the upside.  Another day like today
would do it.

Daily chart of the ten year note yield

Today saw some heavy selling in treasuries, and not just the 15B
3 month treasury note auction, which generated a bid-to-cover
ratio of 2.32 and a median yield of 0.925%.  The ten year note
yield touched a high of 4.324% before backing down, closing
higher by 7.9 basis points at 4.421%.  The move gapped the TNX
above its upper descending trendline in what appears to be a
picture-perfect bull wedge breakout projecting to the 4.6% level
on the daily chart.  The 10 day stochastic has printed a bullish
kiss, and another up day tomorrow should give us clear buy
signals on the oscillators, which would be a sell signal for the
ten year note.

Daily NQ candles

Taking a look at an all-sessions chart, you see that the NQ had
dropped to 1375 as of the cash open at 9:30 EST.  Without access
to the overnight session, most traders were stuck with a 15 point
NQ range to trade, despite Friday's close at 1394.

The NQ faded lower throughout the day, drifting in that 15 point
range and bottoming at 3PM at 1360.  The bounce off the lows was
good for 8 points.  The day's drop brought the daily chart
oscillators to sell signals and broke below the lower rising
flag trendline on the daily chart.  The bounce came from
Fibonacci support at 1360, 34 points below Friday's closing

30 minute 20 day chart of the NQ

On the 30 minute chart, we see the small bear flag support broken
on the gap down, and the ensuing fade throughout the day.  The 30
minute chart oscillators bottomed and finished the day on buy
signals, portending upside into tomorrow and, theoretically, a
return to the scene of the crime rally to fill the gap.  I say
"theoretically" because I don't personally believe it will
happen, but the chart says it could.  I'm pretty convinced that
a good part of last week's rally was opex-related.  I don't know
what will propel the buying to rally equities back up, but the
market will tell us soon enough.  I expect at least a pause at
current levels or rather a sideways bounce, and if the bounce
already underway is as weak as I think it will be, then it will
look like we're seeing the daily chart oscillator downphase
finally getting under way.

Daily ES candles

The picture on ES is exactly the same as on NQ, with a big
unfilled gap, sell signals on the still-toppy daily oscillators,
and an attractive risk-reward balance in favor of the downside.
Note that unlike the NQ, the ES is already below its 78.6%
Fibonacci support.  The low of the day at 1015 came right on the
22 day EMA.  Next support below that comes at 1008.

20 day 30 minute chart of the ES

I've highlighted the bearish divergence on the 30 minute ES chart
to illustrate part of the "magic" of oscillators.  Even as the ES
was rising last week, the 300 minute stochastic was putting in
lower lows against the higher lows in price.  While I'm still
learning to read these divergences, they're a useful tool to have
in our arsenal.

As with the NQ, we have the 30 minute chart oscillators bouncing
on buy signals from deep in oversold.  Oscillators don't
generally get pinned in trending moves, and so the picture they
paint is of a bounce starting now within the longer period
downphase now underway.  A lower price high on the bounce will
confirm it, and a weak "sideways" bounce in price will set the
stage for the next sharp drop.  I see first resistance at 1022,
followed by 1025 and then at 1030.

Daily YM candles

We have the same setup on the YM, except that the daily channel
was not broken to the downside.  I suspect that this is more a
matter of the unpredictable chart scaling than of the YM itself,
but in any event, the cyclic picture is the same as for the NQ
and ES.

20 day 30 minute chart of the YM

The presence of unfilled gaps on a chart is like bait for
traders, as most gaps tend to get filled.  I think of them as a
vacuum in which volume is very thin.  If there was light enough
volume to let the price move too far too quickly for the candles
to print, leaving a gap, then there's little volume to oppose it
in the opposite direction if price revisits it.  If, on the other
hand, the gap does not get filled, then we have the indication of
a strong directional trending move underway.


Check the Site Later Tonight For Jeff's Index Trader Article


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The Option Investor Newsletter                   Monday 09-22-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: AU, GILD, KKD
Dropped Calls: GS
Dropped Puts: None
Play of the Day: PUT - GILD
Watch List: A Brief List for Monday

Updated on the site tonight:
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AU - call
Adjust from $38.00 up to $38.50

GILD - put
Adjust from $64.01 down to $62.75

KKD - put
Adjust from $44.01 down to $42.75


Goldman Sachs Grp. - GS - close: 92.66 change: -1.07 stop: 89.75

After last week's clear breakout in shares of GS above the $92.25
level, today's pullback to just above that level would normally be
the setup for a fresh bullish entry, especially with the
Broker/Dealer index (XBD.X) holding onto the bulk of its recent
gains.  But with GS (along with LEH and MWD) set to report
earnings tomorrow morning before the opening bell, we've got to
pull the plug on the play out of caution.  Another huge upside
surprise could launch GS to new yearly highs, while a
disappointment could see a sharp selloff.  Better to be on the
sidelines, where we can re-evaluate after the initial volatility
subsides.  GS did perform as we expected, rising from our picked
price, but we just ran out of time for any of our upside targets
to be reached as investors have apparently decided to wait for
earnings before continuing the bullish move.

Picked on September 2nd at  $90.45
Change since picked:         +2.21
Earnings Date              9/24/03 (unconfirmed)
Average Daily Volume =    3.52 mln



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Gilead Sciences - GILD - close: 57.71 chg: -2.25 stop: 62.75*new*

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

Why we like it:
It's a tough market to try and find attractive bearish plays
these days so when we do see something that looks trade-worthy
we're loathe to pass them up.  Even if they were a call play
earlier in the week.  Shares of GILD had been enjoying a slow,
but steady climb higher from the $60 level to its old highs near
$70 as the BTK (biotech index) continued to make new relative
highs.  Then out of nowhere J.P.Morgan downgrades the stock to
"neutral" from "over weight" and shares gap lower below support
at the simple 50-dma.  The analyst at JPM felt it was going to be
a lot tougher for GILD to actually beat earnings and revenue
estimates in the future and felt that the stock was already
richly valued.  The stock traded down more than five points on
the downgrade before bouncing a bit into the close.  That was
four days ago.

Since that time shares of GILD have continued to drop despite
Merrill Lynch trying to defend the stock and reiterating their
"buy" rating and $78 price target.  The decline has been on
decent volume and the close under $60 on Friday looks pretty
ominous.  However, we're a bit gun shy in this bullish market
environment and want to see a little more conviction by sellers
in GILD.  Thus we're going to use a TRIGGER at $59.75 to open the
play for us.  The point-and-figure chart suggests that bears can
target support near $55 while the daily chart hints at support
near $50.  If we are triggered we'll open the play with a stop
loss at $64.01 but more conservative traders might want to
consider a stop near $62.50.

Why This is our Play of the Day
Look out below!  Our new bearish play on GILD got off to a roaring
start on Monday, as the stock plunged below our trigger at the
open and continued to slide lower throughout the day.  Buy the
closing bell, the bears had shaved 3.75% from the stock's value
and they did so on very heavy volume (more than double the ADV).
While there's the possibility of some support in the $56-57 area,
the heavy selling volume indicates there's more room to fall.  The
next solid support appears to begin in the vicinity of $54,
growing stronger down to $50.  Failed rebounds below $60 now look
like very solid entry opportunities to those that didn't take the
breakdown entry offered this morning.  Clearly we need to tighten
our stop after today's drop, so we'll lower it to $62.75, just
above what was solid intraday resistance towards the end of last

Suggested Options:
The October and November puts are probably the best bet for
short-term traders.  We like the 60s but the 55s should work well

BUY PUT OCT 55 GDQ-VK OI=1190 at $1.65 SL=0.75
BUY PUT OCT 60 GDQ-VL OI=1346 at $4.10 SL=2.50
BUY PUT NOV 55 GDQ-WK OI=1024 at $3.20 SL=1.50
BUY PUT NOV 60 GDQ-WL OI=1104 at $5.70 SL=3.75

Annotated Chart of GILD:

Picked on September 22nd at $59.75
Change since picked:         -2.04
Earnings Date             10/30/03 (unconfirmed)
Average Daily Volume:         3.71 mln


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Watch List

A Brief List for Monday

Aetna - AET - close: 61.23 change: +0.67

WHAT TO WATCH: Bucking the trend today were shares of AET.  We've
highlighted the stock before as it was approaching resistance
near $60 and its simple 50-dma.  We've since seen a breakout
above both levels and the stock bounced off the $60 mark this
morning.  Bulls willing to buy the bounce can target the next
resistance level near $65.



Newmount Mining - NEM - close: 41.30 change: +0.64

WHAT TO WATCH: Hitting new highs on strong volume is gold mining
stock NEM.  The $5.00 jump in December gold futures towards the
$388 level has the goldbugs jumping for joy and if the U.S.
dollar continues to sink the bullish trend should continue.  The
stock does look a little overbought here but the MACD just
produced a fresh bullish signal.  This is definitely one to watch
and a pull back/bounce from the $40 level might be a decent entry



Lexmark Intl - LXK - close: 66.04 change: -2.96

WHAT TO WATCH: Ouch!  Losing more than four percent on Monday was
LXK.  The stock had rallied right back to resistance at $70 last
week but today's big loss is suggesting the stock will suffer
from a new double-top (bearish pattern).  The big move today put
shares back below the simple 200-dma, another bearish indication.
The stock does look tempting as a potential short play but
traders need to keep an eye on potential support near $64.00.



To Read The OptionInvestor.com Market Posture Click Here


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


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


Please read our disclaimer at:


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Contact Support


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.

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