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Daily Newsletter, Tuesday, 09/30/2003

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The Option Investor Newsletter                 Tuesday 09-30-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Trouble in Paradise
Futures Markets: Currency matters
Index Trader Wrap: Sunstroke
Market Sentiment: Confidence Concerns


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-30-2003           High     Low     Volume Advance/Decline
DJIA     9275.06 -105.20  9378.10  9230.47 1.78 bln   1402/1528
NASDAQ   1786.94 - 37.60  1812.81  1783.46 1.87 bln   1087/1735
S&P 100   498.56 -  6.46   505.02   496.57   Totals   2489/3263
S&P 500   995.97 - 10.61  1006.58   990.36 
W5000    9649.68 - 93.30  9742.98  9595.20
RUS 2000  487.68 -  5.03   492.71   483.56 
DJ TRANS 2673.86 - 36.40  2709.55  2671.03   
VIX        22.72 +  1.05    23.26    22.03   
VXN        32.83 +  2.17    32.83    31.17 
Total Volume 3,979M
Total UpVol  2,999M
Total DnVol    933M
52wk Highs  130
52wk Lows    14
TRIN       1.90
NAZTRIN    2.73
PUT/CALL   1.06
************************************************************

Trouble in Paradise

Those analysts predicting a +6.0% GDP for the 3Q received a
serious shock this morning when several economic reports came
in much lower than expected. There is a rising concern that 
the economic recovery tripped in late August and slid face
first into September. The markets tried to rally off the lows
as the bad news bulls showed up in volume but they ended up
giving back yesterday's gains to close down substantially. 

Dow Chart


 
Nasdaq Chart


 
S&P Chart


 

The morning opened negatively with the Chain Store Sales down
-0.4% and the third straight week in the negative column. Most
retailers were generally below plan for the week. Last week 
analysts said the drop was due to the hurricane. This week 
they said it was more likely a drop due to weakening financial
conditions and not the hurricane. Some analysts said spending
last week was actually helped by hurricane repairs and the
numbers still came in weak. The Bank of Tokyo lowered estimates
once again for September to +3.5%, down from earlier estimates
of +5% and +5% growth in August. Wal-Mart, who has repeatedly
said sales were running ahead of plan, guided analysts to a
lower range for earnings. Analyst's estimates were for 47 cents
and Wal-Mart guided them to 45-47 cents OR a quick calculation
shows us a median of 46 cents and a penny less than the street. 
Jobs are still falling as you will see below and consumers are
beginning to hoard money again now that the tax rebate checks
are gone. 

The NY-NAPM report was flat at 222.2, up only a fraction from 
the August 221.70. There were some positive internals with the
current conditions component rising to 51.1 and the first time
over 50 this year. The rest of the internals were mixed and
analysts had hoped for a generally better showing but they 
were still happy to see the improvement in some key indicators. 

Not so positive was the Chicago PMI, which fell to 51.2 from
58.9 in August. This was very negative and the lowest reading
since April and only marginally over the 50 boundary for
expanding conditions. New orders fell to 53.2 from 60.5 and
employment fell to 45.3 from 51.2. The employment drop is the
most critical component as it indicates management is not
expecting rising demand in the near future. Last month was the
first time in three years that employment rose over 50 and it
could not hold the gains. This would indicate the early quarter
bounce in the economy could have been failing as the quarter
closed. 

Also shocking analysts was the drop in Consumer Confidence to
76.8 from 81.7 and well under the consensus of 82.0. The bulk
of the decline came in the expectations component which fell
to 88.4 from 94.9. This is a large drop and represents a
material shift in sentiment. Consumers planning to buy a home
fell to 2.9 from 4.1, a car 5.4 from 6.6 and a major appliance
to 26.7 from 32.5. This decline in purchasing trends is
substantial with the home buying component at its lows for
the year. The auto number and appliance numbers are at three
year lows and the auto manufacturers were making announcements
after the close to support this outlook. Overall the headline
number was the lowest level since March. This was not a good
report in any context. 

Ford announced after the close that they would be cutting 
-12,000 jobs citing increased competition and falling sales. 
Daimler Chrysler also announced they were planning to layoff
"thousands" in the near future. Numbers due out tomorrow are
expected to show auto sales falling to an annualized 16.8
million units. Ford said it was also going to cut -3,000
contractors. Sales concessions were said to have run as much
as 20% of the list price in September as dealers were told
to push the inventory out the door and get ready for the new
models. High dollar cars were rumored to have been offered
at 30% discounts to unload the inventory. It does not 
appear the consumer is coming to our rescue again. 

One sun rose in the east this morning and another crashed 
into oblivion. SUNW warned that current quarter earnings 
would be less than expected and that it was going to take 
a $1 billion charge. SUNW said it reflects a "particularly 
difficult quarter for the company due in part to intense
market and competitive dynamics." Analysts were expecting 
a -2 cent loss for the quarter and SUNW said it was now
expecting a -7 to -10 cent loss. SUNW lost nearly -15% on
volume of 163 million shares to lead the Nasdaq to a -37
point loss. 

ETS, a network equipment manufacturer, warned that they 
would miss earnings and blamed it on the hurricane. While
I would be skeptical that a hurricane in the last two weeks
of the quarter would cause a miss, that was the excuse. The
sector took it on the chin on the one bad apple principle.
The SUNW warning of a dismal quarter did not help the overall
tech sentiment and ETS just added to the gloom. 

Also not helping sentiment was an announcement from the SEC
that they were investigating FNM/FRE for possible evidence 
of fraud. There are several agencies currently targeting 
those firms not only for evidence of wrong doing but also
for evidence of liquidity. The OFHEO (oversight committee)
said FRE had sufficient liquidity as of June-30th. Glad to 
hear that a quarter later. The committee said they had $29
billion in capital compared to the $4.7 billion required. 
How that capital was impacted by the bond implosion is yet
to be disclosed. 

The major indexes closed the quarter in positive territory
stretching the consecutive strings of positive quarters to
.. two. Yes, two, back-to-back positive quarters. So what?
It was the first time in three years that this has happened.
Break out the bubbly! It was a squeaker for the S&P which 
started the quarter at 975 and at one point this morning 
appeared it could challenge that level today. It was not 
to be and somebody bought the dip and held the indexes up
to push them into the record books and create good press 
for mom and pop investor. I say somebody because the Feds
were in the market today. The Fed intervened on behalf of
the Bank of Japan to stabilize the rising Yen. The BOJ said
they had spent 4.457 trillion yen in the last six weeks to 
keep the yen from climbing against the dollar. ($40 billion
dollars) This was the first intervention by the BOJ since 
the G7 meeting in Dubai called for more flexible exchange 
rates and discouraging intervention. With the dollar diving
today on the bad economic news the BOJ was forced to act to
keep the Yen at 110 to the dollar and the current line in 
the sand. 

Ten Year Yields


 

Once the economic news hit the fan bonds soared with the Ten
Year yields dropping a full 140 basis points. While this is 
a positive for the bond market and the housing market it 
could be a negative for the stock market. Cracks are 
beginning to appear in the economic recovery picture and 
it appears there could be a concerted effort to sell stocks
and buy bonds in process. 

The markets may have finished the quarter with a gain but 
they finished the day with a loss and at the low for the 
month. There was a definite attempt to buy the dip intraday
but it failed as darkness approached. Some claimed that the
intraday buying was last ditch end of quarter window dressing
from funds that wanted to show stocks on the books but not
willing to buy at higher risk levels over the last couple 
weeks. While that could be true it paints a bleak picture 
for the coming week. 

For those that were trying to hold on until September closed
the pressure is off. The first day of October is known for
losses as the window undressing begins. Ironically the 
following two days are typically up. The Dow closed under
9300, the S&P under 1000 and the Nasdaq well under 1800 again.
The Dow and SPX are well under their 50 DMA and the Nasdaq
is pressing it at 1779. 

The drops are beginning to worry traders as they are occurring
on stronger volume with today's move on over 4.1 billion shares.
The down volume was 3:1 over up volume. The VXO (old VIX) hit
24.98 today and is showing an increasing level of fear in the
market. The new VIX hit a high for the month at 23.26 despite
its lower volatility. Even more amazing was the TRIN which 
closed at 1.90 and the Nasdaq TRIN at 2.73. These are very
oversold indicators but odds are good they will get more
oversold before the week is out. 

On Wednesday we are facing the ISM report and the consensus 
is for a headline number that is flat with last months 54.7.
If it holds there the carnage may be spared. That was the 
highest reading since the 55.2 in December-2002 and the same
reading in June-2002. March through June-2003 were under 50
and showing contraction with July at 51.8, a squeaker back
above the line and then the large spike to 54.7 in August. 
There are quite a few analysts that expect the ISM to drop
several points below consensus but any number over 51 should
keep the bears at bay. As long as traders can grasp at the
"over 50" economic expansion hope we should not see any fresh
new economic selling. We also get construction spending and 
layoffs tomorrow. The worry for the week is that the nonfarm 
payrolls on Friday will break 100K in job losses. The current 
estimate is -25K but the whisper number is growing. 

This puts the bears on the defensive. With negative expectations
for the ISM and Jobs it sets up a potential relief bounce if
the numbers are not as bad as the whisper numbers. This means
bears are probably not as likely to short heavily into the
announcements. The risk of disaster is more on their heads
than the bulls. The bulls already know this is a bad season
and the recent reports and earnings warnings have them in
bunker mode. The wild card tomorrow is the window undressing,
if any, and then the wait for Friday. If you are long the 100
DMA on the S&P is at 988 and the 25% retracement level at 977.
Both of those levels should provide some support but we are
in October. This month is known for some monster drops but
it is also known as the "bear killer" month. Investors know
to buy the October dip and ride it into January and hopefully
that will happen again this year. For tomorrow, ISM is the
morning focal point then we are on our own until we see if
the institutions are undressing or not. The ISM could help
make up their minds. If the number drops in the 50 range it
could convince many investors that the recovery is in danger
and profits in hand now allows for selective buying later. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Currency matters
Jonathan Levinson

Talk of currency intervention moved the markets today, rescuing 
the US Dollar Index above 92.  Precious metals and commodities 
advanced notwithstanding, equities sunk, and bonds rallied.

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 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




Once again, the chart says it all.  An attempted bounce overnight 
was sold heavily, while that this morning took hold and helped 
the US Dollar Index bounce from support at its summer lows. The 
news story as covered by Yahoo Finance from Reuters read as 
follows:

“NEW YORK (Reuters) - Japan's Ministry of Finance sold yen for 
dollars on the foreign exchange markets on Tuesday, a ministry 
official said, acting through the U.S. Federal Reserve in a move 
that jolted the dollar sharply higher.

[...]

Below 110 yen, the BoJ (would have) got very nervous. The BoJ's 
action allows it to re-peg the dollar between 111-115. But it 
would be very hard to put it back up to 115 yen," said Philip 
Capone, senior trader at Fortis Bank in New York.”

Gold and silver advanced, as did the CRB, which added 1.22 to 
243.65, led by heating and crude oil, FCOJ and wheat futures.  
Equities dropped and treasuries advanced.  Notwithstanding 
central bank manipulation, it appears that the dismal consumer 
confidence data had a significant effect on the US markets as 
investors behaved predictably and clutched for bonds while 
dumping equities.  Nevertheless, the decline in equities was 
stemmed around the same time as the slide in the dollar, and 
began an advance that lasted through most of the day.  Despite 
that advance, equities remained in negative territory for the 
duration. 

There’s no need to rant or rave about the Working Group on 
Capital Markets, the Plunge Protection Team, or anyone else.   
The bounces in the dollar and the S&P futures came at support 
levels and regardless of one’s beliefs in the merits of technical 
analysis, the buyers were attentive to their chart levels.  
Whoever waited until 30 minutes after the terrible economic data 
was released to begin buying futures sharply was looking at a 
chart that showed the same support at 988 that many of us have 
been seeing since the summer’s trading range in that area.  The 
move launched from the second visit to the 988 ES level, an 
intraday double bottom. Be it intervention or dip buying, the 
effect is the same, and the charts help us to be attentive at 
price levels at which the market is vulnerable to such moves.


Daily chart of December gold


 

I heard talk today totaling the value of the BoJ’s currency 
interventions for the month of September $40B US dollars, and 
$122B for 2003 to date.  These are difficult sums to comprehend.  
The rally in gold seems small relative to what one might expect, 
but the trend is clear nonetheless.  Dec gold added to 
yesterday’s gains, printing an intraday high at 389.50, unwilling 
to try for the so-far difficult 390 level.  Still, a higher high 
and higher low from yesterday, always within the bearish 
formations on the daily chart.  The oscillators are sliding 
sideways, awaiting the next directional move.  It’s encouraging 
to have seen gold and silver finish positive against the declines 
in equities today.  As of this writing, December gold was up 3.10 
at 386.30.


Daily chart of the ten year note yield


 

Treasuries found the bids one would have expected on the poor 
economic data, assisted by yet another repo from the Fed, this 
one adding 3B to the considerable amount of money invested by its 
open market operations desk.  The ten year note yield (TNX) 
dropped 14 basis points to close at 3.937% in a trending move.  
The oscillators are now becoming pinned in oversold territory, 
and the wedge failure looks very bearish for the TNX/bullish for 
treasuries.

Daily NQ candles


 

The NQ printed a bearish engulfing candle over yesterday’s 
bullish engulfing candle, displaying anything but consensus over 
the current price level.  The daily oscillator downphase 
continues, with round number support at 1300 taking on more 
significance that we might otherwise expect.  A new low for the 
move was printed before the 10:30AM buying spree at 1303, but the 
NQ closed at 1305, within spitting distance.  Other than lower 
Bollinger band support, the failure to hold 1320 looks very bad 
for the bulls.


30 minute 20 day chart of the NQ


 

The 30 minute chart holds out more hope for a bounce, as the 
decline continues to trace out a bull flag, and, more 
significantly, there’s a clear bullish divergence printing on the 
oscillators.  Both the Macd and stochastics show a pattern of 
higher highs since last Thursday, compared with lower price lows.  
Despite my feeling entirely bearish on the NQ, ES and YM, these 
divergences have proven themselves useful this year.  With the 
upper descending trendline looming close overhead at 1315 NQ, we 
should have our answer shortly.  A sustained break below 1300 
would set a new oscillator low below the rising trendline and 
invalidate the divergence.

Daily ES candles


 

The ES closed at 994.50 following a sharp bounce off 987.75 
following the 10AM data.  Unlike the NQ, it never came close to 
that low on the afternoon dip, and while the daily candle is not 
bullish, the long candle tail is far less discouraging than the 
bearish engulfing on the NQ.  Critical support remains at 988, 
resistance first at 1001, followed by 1008.  The downphase on 
this daily timeframe continues within the broader context of our 
bear wedge breakout projecting to a possible 957 downside target.


20 day 30 minute chart of the ES


 

We have the same bullish divergence on the 30 minute ES, and the 
break above 1000 this afternoon had many wondering if a breakout 
wasn’t occurring.  It failed, and the afternoon dip risks 
truncating the current oscillator upphase.  As with the NQ, we 
need to see a breakdown before the upper descending trendline 
fails, in this case at 997 ES.  Here’s how it looked on the 150-
tick intraday chart:


150-tick chart of the ES


 

Note that the short cycle oscillators are bottomy and suggest a 
bounce.  However, a trending move lower would reverse the longer 
30 minute chart oscillators above, and jeopardize the 988 low 
currently printed.


Daily YM candles


 

Same story on the YM.


20 day 30 minute chart of the YM


 


For tomorrow, the prescription is the same.  As no trade is 
better than a bad one, tight stops and a flexible outlook remain 
key.  So far, we’re seeing a pattern of lower price lows and 
lower price highs in accordance with the ongoing daily chart 
downphases.  The countertrend bounces on the 30 minute charts 
have failed at the upper trendlines, but the lows have been 
triggering a pattern of higher oscillator bottoms, suggesting 
growing strength from lower levels.

With end of month window dressing coming to an end, the remainder 
Of the week could hold surprises in either direction, and there 
remains the continuing wildcard of currency intervention.  See you 
at the bell!


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

Sunstroke

The major indices finished in the red after Sun Microsystems 
(NASDAQ:SUNW) $3.31 -14.2% said the company would take a $1.05 
billion charge and would post a sizeable loss after reviewing the 
amounts of deferred tax payments it carried on its books, would 
be of little future use, as the company struggled to post taxable 
profits as its corporate customers remained cautious on spending.  
Sun said it re-evaluated the assets under the accounting rule 
known as, "Statement of Financial Accounting Standards No. 109."

While much of SUNW's expectations for a larger earnings per share 
loss is company specific, the company's announcement, which cited 
concerns that indicated an industry shift away from its 
traditional UNIX-based servers also weighed on Vertitas Software 
(NASDAQ:VRTS) $31.52 -2.89%, BEA Systems (NASDAQ:BEAS) $12.04
-1.39% and BMC Software (NYSE:BMC) $13.93 -1.13%.

Merrill Lynch lowered its fiscal 2004 revenue estimate for Sun by 
$100 million to $11.2 billion and its bottom-line forecast to a 4 
cent-a-share loss from an earlier breakeven projection.   
Meanwhile, Sanford Bernstein's Toni Sacconaghi said that in the 
face of lower sales, Sun would need to cut about 7,000 jobs to 
get its revenue-to-employee numbers back in line with figures 
from the boom years of 1998 and 1999.

While multiple brokerage downgrades followed, the news did seem 
to be very stock specific, and not necessarily an industry wide 
move.  Some analysts cautioned investors to not throw the baby 
out with the bathwater.  SG Cowen analyst Richard Chu called 
Sun's move a "conservative treatment" even though the company is 
not completely certain it can return to regular profitability 
anytime soon.  "This is the proper thing to do," Chu said. "You 
write down items that are not predicated on a return to 
profitability.  These are non-cash items, so I think the 
investment community will largely overlook Sun's move."

As shares of Sun Microsystems set below their flat longer-term 
200-day simple moving average of $3.83, the land of the rising 
sun, Japan, announced that its Finance Ministry sold yen and 
bought dollars, which was conducted through the New York Federal 
Reserve, in an attempt to reverse the latest decline in the 
dollar against the yen.  The sales of yen helped the dollar jump 
over Y1 (1 yen) higher after weak US consumer confidence data had 
driven down long-term interest rates and pushed the US currency 
to a three-year low of Y110.12. 

Japan's tactic of interacting with the New York Federal Reserve 
marked a change in strategy, where in the past, the Bank of Japan 
had been selling covert waves of yen to try and maintain a weaker 
yen to help its economy recover and have its exports attractive 
to consumers in the U.S. 

The cooperation between the New York Federal Reserve and Japan 
gave currency traders mixed signals on the U.S.'s recent talk of 
a strong dollar policy, and the recent G7 meeting where the 7 
major industrialized countries had apparently agreed to let more 
natural market dynamics establish currency values.

At the end of the day, Japan's Finance Ministry showed it had 
sold 4.4574 trillion yen, a monthly record, in the currency 
market in September after refraining from intervening in August.  
Currency analysts believe virtually all the intervention was 
carried out before September 20, when the G7 issued its statement 
calling for flexibility in exchange rates.

"After the G7 statement, the Bank of Japan has essentially been 
forced by the market to accept a lower trading range," said Tony 
Norfield, head of foreign exchange strategy at ABN Amro. 

However, today's soft U.S. economic data from the Conference 
Board's September Consumer Confidence Index and lower than 
forecasted day's September Chicago PMI also raised the risk that 
the rapid acceleration in the US economy over the summer would 
lose steam, and perhaps threaten a global economic recovery, 
which a weaker dollar might only threaten further.

The combined news of Japan's intervention and weaker economic 
data found Treasury bonds seeing strong buying in today's session 
as past interventions by Japan to sell yen and buy dollars has 
found those dollars buying Treasuries, while the weaker economic 
data brought some defensive buying from investors on thought a 
slow to moderate rate of economic growth has Treasuries being a 
safer investment asset class.  The shorter-dated 5-year YIELD 
($FVX.X) fell 15.2 basis points to 2.823%, the benchmark 10-year 
YIELD ($TNX.X) dropped 14 basis points to 3.937% and the longest-
dated 30-year YIELD ($TYX.X) declined 12.1 basis points to 
4.884%.

With consumer confidence suffering a bit of a setback in 
September, it might be a logical jump to conclusion that the 
retailers might be a sector for traders to monitor, as a way to 
get a read on what the MARKET is thinking about today's economic 
data, specifically consumer confidence and future spending plans.  
Over time, I've noticed that both the S&P Retail Index ($RLX.X) 
334.39 -1.06% and the Retail HOLDRS (AMEX:RTH) $84.87 -1.3% tend 
to mimic each other's technicals.  Both trade options, but the 
retail HOLDRS also allow the individual investor to buy or sell 
short the underlying security.

S&P Retail Index (RLX.X) Chart - Daily Intervals


 

I've overlaid a retracement bracket on the RTH, using 
conventional technique of attaching at a low and recent high.  A 
normal pullback for a stock would be to $80.50 and we find the 
RTH having broken below an aggressive bullish trend, which may 
have come into play as resistance when the RTH achieved its most 
recent high on September 3.  Make note of September 3.  When the 
RTH was setting a new 52-week high, this was right when the SPX 
and OEX broke out of their summer bases.

S&P 500 Index Chart - Daily Intervals


 

As the retailers were achieving a relative high, the SPX was just 
breaking out of its summer base.  Now the retailers look to be 
leading lower, based on their conventional retracement, where 
today we see the SPX still holding above its 19.1% retracement.  
While I wouldn't disregard the 992 level on this retracement, it 
didn't seem to be a meaningful level this summer, other than 
serving as somewhat of a waterline that the SPX traded either 
side of.  The conventional retracement doesn't help explain what 
was going on at 961 this summer, when the SPX found support on 
pullback two separate times.  It is at least informative to 
compare both the RTH and the SPX with conventional retracement 
and similar trends to see how the two might be impacted by each 
other, with the retailers being a sector that would be impacted, 
both positive and negative, with rising consumer confidence or 
weakening consumer confidence.

For a "blast from the past" and perhaps an explanation of why the 
SPX found support at 961 in early August, check out our old Index 
Trader Wrap from August 6 titled "I'm counting on you for 
strength." 
http://members.OptionInvestor.com/Itrader/marketwrap/iw_080603_1.ASP

The RTH looks as if it is vulnerable to a lower trade, and 
perhaps the MARKET sniffed out the Conference Board's Consumer 
Confidence setback in September, which was released today, 
earlier this month.  What will October's consumer confidence 
reading be?  Watch the RTH!

S&P 500 Index (SPX.X) - Daily Intervals


 

Here's a chart of the SPX with new October MONTHLY pivot 
retracement in place.  We now see a more formidable level of 
resistance appear at the 1,008 level and when the WEEKLY pivot of 
1,009.74 was there by itself.  This has me more cautious on 
larger bullish positions and a greater measure for rebound 
strength in the SPX above 1,010.  

While the extension of our "old" downward trend came into play as 
support at this morning's lows, that's what stands between 
today's close and WEEKLY S1.

Bears can't be too bearish here, with the SPX managing to hold 
the bullish trend (green trend) on a closing basis.  Tomorrow's 
more national ISM Index for September is forecasted at 55.0, and 
will be a comparison, to today's more regional Chicago PMI.

Today's trade saw a net loss of 3 stocks to point and figure sell 
signals in the broader S&P 500 Bullish % ($BPSPX).  Still "bull 
confirmed" at 76.80%, but getting closer to the 76% reading, 
which would be a reversal back lower to "bull correction" status.  
As a benchmark, in early August, the bullish % pulled back to 74% 
before the recent reversal back higher.  As such, we might 
eyeball a break below the MONTHLY S2 of 959, should the S&P 500 
Bullish % ($BPSPX) fall to 72% and achieve a "bear confirmed" 
status.

Dow Industrials (INDU) Chart - Daily Interval


 

This morning's economic data gave little chance that the Dow 
could show some leadership and not unlike the SPX, has MONTHLY 
Pivot now serving as a level of near-term resistance.  I hesitate 
to think a trader should be overly bearish at current levels, as 
I do think there is higher likelihood for a bounce back to 9,500, 
or the opportunity to look for better bearish entry when 
Stochastics turn higher and are "overbought."  

I will say that I was surprised that today's Consumer Confidence 
and Chicago PMI data were as far off of Augusts' levels as they 
were.  I'm not sure I was surprised that economists were as far 
off as they were however.  I'm not taking a shot at economists, 
but we've noted that in weekly employment data they have 
explained their error.  I don't recall reading many explanations 
from economists regarding today's economic data forecasting 
models, and there may be some adjusting going on today.  Not only 
in some economic forecasting models, but stock portfolios as 
well.

I have not had the time to look at the 30 Dow components point 
and figure charts, but a bullish % watcher e-mailed me today that 
the Dow Industrials Bullish % ($BPINDU) did not lose 1 stock to a 
point and figure sell signal yesterday, and that the net loss of 
1 stock I reported from www.stockcharts.com was the result of 
3M's (NYSE:MMM) $69.07 -1.7% 2:1 stock split.  I do see where 
www.stockcharts.com is showing the bullish % back at 80% today 
and still "bull confirmed."  I will take some time later tonight 
to confirm this for myself.  Not that I don't believe our 
subscriber, but just want to make sure.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals


 

The QQQ saw steady and still rather heavy volume traded today and 
hints to me that the QQQ is not yet "sold out" on the current 
pullback.  In early August, under similar technical setup, the 
QQQ saw just over 111 million shares trade, then volume decline 
over the next four periods.  Volume still pretty heavy on a 
comparison basis and has QQQ vulnerable to $31.88 and WEEKLY R1.

Today's trade saw a net loss of 3 stocks to point and figure sell 
signals as the NASDAQ-100 Bullish % ($BPNDX) fell 3% to 75%.  
Still "bear correction" status and would take a reading of 74% to 
reverse back lower to "bear confirmed" status.

This internal weakening has me looking at $33.80 as more 
formidable resistance.

Jeff Bailey


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

Confidence Concerns
- J. Brown

The September Consumer Confidence numbers were much worse than 
expected and the report immediately spooked jumpy investors into 
another round of selling.  Economists had been looking for a dip 
to 80.7 in September, down from 81.7 in August.  What we got was 
a drop to 76.8 in September.  Compounding the consumer confidence 
issue was the chain-store-sales index, which fell for its third 
week in a row.  More than 2/3rd's of the U.S. economy is powered 
by the consumer and low consumer confidence does not translate 
into sales.

Adding fuel to the fire was last night's earnings warning from 
Sun Microsystems (SUNW).  Investors did not react kindly to the 
news and SUNW was joined by two more tech companies Enterasys 
Networks (ETS) and Regeneration Technologies (RTIX) with their 
own earnings warnings.  

Market internals were bearish as investors fled from equities 
into the perceived safety of bonds and gold.  The yield on the 
10-year note fell to 3.94 percent as bonds surged.  Gold rallied 
most of the session and many are speculating that the weak dollar 
environment could drive gold to the $400 level by year's end and 
possibly the $450 level by the end of 2004.   

We don't have much longer before the Q3 earnings season begins 
but until then the markets will be driven by the parade of 
economic reports and the new focus on currency fluctuations 
between the dollar/yen/euro.


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

Market Averages

DJIA ($INDU)

52-week High:  9686
52-week Low :  7197
Current     :  9275

Moving Averages:
(Simple)

 10-dma: 9471
 50-dma: 9351
200-dma: 8695



S&P 500 ($SPX)

52-week High: 1040
52-week Low :  768
Current     :  995

Moving Averages:
(Simple)

 10-dma: 1016
 50-dma: 1002
200-dma:  931



Nasdaq-100 ($NDX)

52-week High: 1406
52-week Low :  795
Current     : 1303

Moving Averages:
(Simple)

 10-dma: 1355
 50-dma: 1308
200-dma: 1146



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

As expected the drop is the broader markets is driving a move
higher for the fear indices.  

CBOE Market Volatility Index (VIX) = 22.72 +1.05
Nasdaq Volatility Index (VXN)      = 32.83 +2.17

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.06        496,585       527,325
Equity Only    0.95        362,216       344,880
OEX            0.71         34,990        24,713
QQQ            3.24         30,416        98,565


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

Bullish Percent Data

           Current   Change   Status
NYSE          71.3    - 1     Bull Confirmed
NASDAQ-100    75.0    - 4     Bear Correction
Dow Indust.   80.0    + 0     Bear Confirmed
S&P 500       76.8    - 2     Bull Confirmed
S&P 100       78.0    - 2     Bull Correction


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  1.66
10-Day Arms Index  1.32
21-Day Arms Index  1.19
55-Day Arms Index  1.06


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    1308      1233
Decliners    1526      1886

New Highs      72        85
New Lows       14        11

Up Volume    537M      365M
Down Vol.   1212M     1484M

Total Vol.  1780M     1861M
M = millions


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

Commitments Of Traders Report: 09/23/03

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

The latest option/futures expiration appears to have reduced
some outstanding positions and commercial shorts saw the biggest
drop.  Suddenly, professional longs are dead even with shorts.
Meanwhile, small traders closed a large chunk of long positions.


Commercials   Long      Short      Net     % Of OI
08/26/03      410,378   472,987   (62,609)   (7.1%)
09/02/03      417,973   482,392   (64,419)   (7.2%)
09/09/03      418,958   486,209   (67,251)   (7.4%)
09/23/03      395,123   397,858   ( 2,735)   (0.0%)

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
08/26/03      170,424    76,967    93,457    37.8%
09/02/03      169,030    75,748    93,282    38.1%
09/09/03      176,401    81,444    94,957    36.8%
09/23/03      139,482    87,981    51,501    22.6%

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

We have a major reversal in the works here.  Commercial long
positions dropped about 260K, instantly changing sentiment to
bearish.  Small traders had a change of heart and suddenly 
went excessively long, which is ironic now that the SPX just
broke support.


Commercials   Long      Short      Net     % Of OI 
08/26/03      338,766   234,841    103,925    18.1%
09/02/03      347,724   224,011    123,713    21.6%
09/09/03      370,909   237,610    133,299    21.9% 
09/23/03      109,417   204,026   ( 94,609)  (30.2%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
08/26/03       52,131   120,853   (68,722)  (39.3%)
09/02/03       56,709   134,094   (77,385)  (40.6%)
09/09/03       59,692   130,270   (70,578)  (37.1%)
09/23/03      175,750    62,558   113,192    47.5%

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

The recent expiration appears to have reduced the number
of outstanding positions but sentiment remains bearish for
commercials and bullish for small traders.


Commercials   Long      Short      Net     % of OI 
08/26/03       33,991     55,849   (21,858) (24.3%)
09/02/03       37,002     55,379   (18,377) (19.9%)
09/09/03       44,677     62,369   (17,692) (16.5%)
09/23/03       32,648     42,565   ( 9,917) (13.2%

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
08/26/03       26,108     8,864    17,244    49.3%
09/02/03       23,168    10,561    12,607    37.4%
09/09/03       28,788    13,370    15,418    36.6%
09/23/03       17,862     9,880     7,982    28.8%

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 same can be said for the $INDU futures with outstanding
positions dropping, the sentiment remains the same with
commercials feeling bullish.  However, small traders are
feeling a lot more neutral with a drop in short positions.


Commercials   Long      Short      Net     % of OI
08/26/03       24,586    10,386   14,200      40.6%
09/02/03       25,462    10,447   15,015      41.8%
09/09/03       25,807    10,756   15,051      41.2%
09/23/03       15,911     9,123    6,788      27.1%

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
08/26/03       14,115     5,592    8,523     43.2%
09/02/03        6,629    13,402   (6,773)   (33.8%)
09/09/03        7,429    13,796   (6,367)   (30.0%)
09/23/03        7,505     7,779   (  274)   ( 1.8%)

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

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


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The Option Investor Newsletter                  Tuesday 09-30-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: LEA
Dropped Puts: KKD
Call Play Updates: AMZN, APOL, EXC, SLB
New Calls Plays: RYL
Put Play Updates: CCMP, GILD, ITT, JCI
New Put Plays: None


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

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


CALLS:
*****

Lear Corp - LEA - close: 52.64 change: -0.96 stop: 53.25     

The market weakness has just been too much pressure for 
shareholders of LEA and the selling quickly pushed the stock 
through our stop at $53.25 this morning.  We had grown pretty 
cautious as the stock slowly drifted lower the last few days and 
suggested no new bullish entries.  Shares did bounce from the 
$52.25 level but the afternoon roll over today doesn't look good. 

Picked on September 16 at $54.05
Change since picked:      - 1.41
Earnings Date           10/17/03 (confirmed)
Average Daily Volume:        694 thousand
Chart =



PUTS:
*****

Krispy Kreme - KKD - cls: 38.50 chg: +0.51 stop: 40.36      

After some debate we've decided to close the play on KKD.  The 
stock has stalled its descent at the $37.70 level and can't seem 
to break it.  While today's gain could just be an oversold bounce 
we really don't want to see current profits evaporate.  The 
positive move certainly didn't sit well with us given the down 
market.  The stock could easily rebound to the $40 level and 
still maintain its bearish trend.  We'd much rather close it now 
and look for a new entry on a failed rally at $40 then watch it 
bounce and get stopped out.  We don't see any new headlines but 
KKD certainly got plenty of negative publicity on CNBC yesterday 
as they discussed the high number of insiders who were selling 
near the recent top.  More aggressive traders will to take the 
heat should monitor their stop losses closely.

Picked on September 8 at $41.69
Change since picked:     - 3.19
Earnings Date          08/21/03 (confirmed)
Average Daily Volume:       1.0 million 
Chart =



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

Amazon.com - AMZN - close: 48.43 change: -1.43 stop: 46.50

The last few days have proved quite volatile for the Internet 
stocks with our AMZN play looking weak on Friday, strong 
yesterday and weak again today.  The good news is that it remains 
in the upper half of its channel and above what should now be 
strong support near $47.  The bad news is that the stock ended 
the day at its low of the day and slightly below Friday's close.  
We're looking for a serious test of support over the next couple 
days and the outcome of that test will determine whether the play 
is still viable.  First support comes in at the center of the 
channel (currently $47.90), then the 20-dma ($47.44) and then 
prior resistance near $47.25.  A solid rebound from this zone of 
support can be used for new (although aggressive) entries.  
Traders looking to enter on strength will want to see AMZN get 
back above the $50 level before considering new positions.  
Maintain stops at $46.50 for now, as that remains just below the 
30-dma.

Picked on September 18th at  $47.89
Change since picked:          +0.54
Earnings Date              10/21/03 (unconfirmed)
Average Daily Volume =     8.87 mln
Chart =


---

Apollo Group - APOL - close: 66.03 chg: -0.81 stop: 64.50*new*

Shares of APOL continue to bounce from support near the $65 mark 
but they can't seem to gain any momentum with the broader markets 
slipping backward.  More aggressive traders can use the pull back 
to $65 as an entry point but more conservative traders may want 
to wait for a bit of momentum. A move over $67.00 might work.  
Yesterday Lehman Brothers raised their price target on the stock 
to $72 and suggested to clients to buy the dips.  Sounds like a 
plan to us.  We're going to raise our stop loss to $64.50

Picked on September 16 at $68.45
Change since picked:      - 2.45
Earnings Date           10/07/03 (confirmed)
Average Daily Volume:        1.9 million 
Chart =


---

Exelon Corporation - EXC - close: 63.50 change: -0.20 stop: 61.00

Monday's breakout certainly got our EXC play started off on the 
right foot, but as mentioned in last night's play of the day 
writeup, more upside without some consolidation first would likely 
be tough to manage, with the stock closing right on the 
upper Bollinger band and just below the top of the rising 
channel.  Sure enough, today's session offered some consolidation 
and it was pretty encouraging to see the entire range near the 
upper end of yesterday's range.  The best setup for new positions 
still looks like a pullback and rebound from the center of the 
channel (currently $62.60), with additional support provided by 
the 10-dma ($62.52).  EXC is not a fast-moving stock, so we 
should be able to wait for it to come back to us, rather than 
chasing it higher.  Support should now be strong in the $61.50-
62.00 area, as that was the site of last week's closing lows, and 
has the 20-dma ($61.42) rising to reinforce that support.  
Maintain stops at $61, just below the bottom of the channel.

Picked on September 28th at  $62.64
Change since picked:          +0.86
Earnings Date              10/28/03 (unconfirmed)
Average Daily Volume =     1.16 mln
Chart =


---

Schlumberger Ltd. - SLB - close: 48.40 change: -0.78 stop: 47.50

The outlook for our SLB play is not promising, as the stock 
cracked below its rising trendline ($48.60) at the close, 
something that didn't occur at all during the consolidation 
during August and September.  We've mentioned in recent updates 
that the break back inside the bullish triangle pattern didn't 
look encouraging and this break under the bottom of the pattern 
looks particularly ominous.  But with strong support in the 
$47.60-48.00 area, we're going to take a chance on another 
rebound from that support.  Helping to reinforce that support is 
the 50-dma at $47.78.  We are not recommending new positions at 
this time.  The only entry strategy that makes sense is if the 
stock can rebound strongly and get back over the initial breakout 
level of $49.75.  Buying this dip just looks a bit too risky 
until we see renewed signs of strength.  Maintain stops at $47.50 
as a break below that level will be a very clear sign of a busted 
play.

Picked on September 21st at  $50.99
Change since picked:          -2.59
Earnings Date              10/21/03 (unconfirmed)
Average Daily Volume =     3.12 mln
Chart =



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

The Ryland Group - RYL - close: 73.11 change: -1.82 stop: 69.50

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:
In case you haven't noticed, bond yields have been falling over 
the past couple weeks.  By Tuesday's close, the yield on the 30-
year bond was back under 4.9% for the first time since the middle 
of July.  This pullback in the long-term interest rates hasn't 
been lost on the Housing stocks, with the Dow Jones Home 
Construction index ($DJUSHB) working its way steadily higher in 
an ascending channel from the early August lows.  Today's 1.5% 
gain pushed the index to its best close since June 17th, and it 
looks like a test of the June high ($482) is coming up.  RYL has 
been trading very much in-line with the DJUSHB in recent weeks 
and today's 1.56% gain helped the stock to deliver its best close 
since mid-July.  The stock has been working higher in its own 
ascending channel and today it managed to close in the upper half 
of that channel for the first time in over a week.  Another 
encouraging sign is the way the 20-dma ($70.94) has been 
providing support over the past 5 weeks.

The PnF chart is clearly bullish, on a Buy signal, in a column of 
X and with a vertical count of $91.  We're not necessarily 
looking for that level to be reached in the near-term, but a 
breakout over the June/July highs seems likely.  In the past, RYL 
has had a tendency to make powerful and violent moves, but in the 
past few weeks, the gains have been more measured and in a two 
steps forward, one step back fashion.  That means the preferable 
way to enter the play will be to look for a pullback to support 
and enter on the rebound.  Another factor that argues against 
momentum entries right now is the way the stock was turned back 
today from the upper Bollinger band ($73.76) at the close.  
Target entries on a rebound from the 20-dma and look for a first 
target in the $77-78 area, near the June/July highs.  That will 
likely produce a round of profit taking ahead of our expected 
breakout over the $80 level.  Our stop is initially set at 
$69.50, just under both the bottom of the channel ($69.75) and 
the 30-dma ($69.59), both of which have provided consistent 
support in the past several weeks.

Suggested Options:
Shorter Term: The October 75 Call will offer short-term traders 
the best return on an immediate move, as it is just slightly out 
of the money.

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the January 80 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 January 75 Call.  There 
are November strikes available as well, but note that open 
interest is still very light.

BUY CALL OCT-70 RYL-JN OI=1261 at $4.60 SL=2.75
BUY CALL OCT-75 RYL-JO OI=1729 at $1.70 SL=0.75
BUY CALL NOV-75 RYL-KO OI=  25 at $3.50 SL=1.75
BUY CALL JAN-75 RYL-AO OI= 447 at $5.20 SL=3.25
BUY CALL JAN-80 RYL-AP OI= 409 at $3.30 SL=1.75

Annotated Chart of RYL:


 

Picked on September 30th at  $73.11
Change since picked:          +0.00
Earnings Date              10/21/03 (confirmed)
Average Daily Volume =        832 K
Chart =



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

Cabot Microelect. - CCMP - cls: 55.63 chng: -2.40 stop: 
58.25*new*

If you like volatility, then you've got to love CCMP this week.  
We figured the stock was due for an oversold rebound after 
reaching support at $56 last Friday and that's exactly what 
happened yesterday, with the stock rebounding with the overall 
Semiconductor index (SOX.X) to end right at $58 resistance.  CCMP 
quickly fell back from that level this morning, providing a 
fleeting rollover entry opportunity ahead of the plunge back 
below $56.  Buyers appeared again, but that bounce stalled just 
over $57, providing an aggressive entry point yet again this 
afternoon before the final-hour plunge below $56.  Closing near 
the day's low and at its lowest closing level since early July 
certainly looks bearish and with the SOX closing under $420, 
we're looking for CCMP to now make strides towards next support 
near $52.50.  Another failed rebound below $58 (preferably below 
$57.50) looks good for continuation entries, as does a break 
below today's $55.50 intraday low.  Just in case of a strong 
rebound though, we're lowering our stop to $58.25, just above 
yesterday's intraday high.

Picked on September 23rd at    $59.05
Change since picked:            -3.42
Earnings Date                10/23/03 (unconfirmed)
Average Daily Volume =          767 K
Chart =


---

Gilead Sciences - GILD - close: 56.04 chg: +0.04 stop: 60.01     

Hmmm... this looks like a dangerous time for GILD traders.  
Yesterday's early morning weakness pushed GILD through support at 
$55 down to the $53.50 area.  Unfortunately, the stock fully 
participated in the market-wide bounce and shares were positive 
by Monday's close.  The bounce continued into Tuesday's morning 
but sellers took over when the stock hit $57.19.  We suggest 
caution and new positions are probably not recommended until GILD 
trades back under the $55 mark again.  Very conservative traders 
could use today's high to guide their stop loss placement.  There 
are no new headlines.  However, Point-and-Figure chart fans will 
note that the recent bounce off the low is a PERFECT rebound from 
the bullish support line.  Definitely use caution.  We might 
consider closing the play if GILD trades back toward the $53.50 
level again.

Picked on September 16 at $59.40
Change since picked:       -3.36
Earnings Date           07/31/03 (confirmed)
Average Daily Volume:       3.31 million  
Chart =


---

I T T Industries - ITT - cls: 59.84 chg: -0.62 stop: 62.51

We don't have a lot to report for the new put play on the list.  
Shares of ITT failed again at the simple 200-dma during 
yesterday's bounce.  Today makes it the second time in as many 
days.  Bearish entries still look attractive here.  The intraday 
chart is almost suggesting a short-term bearish flag 
consolidation pattern and if that's the case then some traders 
may want to wait for a move back through the $59.40 mark before 
opening positions.

Picked on September 28 at $59.64
Change since picked:       +0.20
Earnings Date           07/28/03 (confirmed)
Average Daily Volume:        546 thousand 
Chart =


---

Johnson Controls - JCI - cls: 94.60 chng: -1.05 stop: 97.75*new*

Traders looking for a little bit of excitement certainly weren't 
disappointed by JCI today, as the stock plunged sharply at the 
open, reaching an intraday low just above $93.  That gave strong 
confirmation to Monday's dip below $95, which generated that PnF 
Sell signal we were expecting.  Just as quickly as the stock fell 
though, it rebounded back above $95, leaving the bears more than 
a little confused.  Broad market weakness into the close helped 
to push JCI back under the pivotal $95 level at the close and 
that looks encouraging for our play.  Now that we have a solid 
Sell signal on the PnF chart (vertical count of $87), failed 
rebounds below $96 look like solid entry opportunities.  Adding 
to our bearish conviction, JCI is now below the ascending 
trendline from the March lows and our initial target of $90 looks 
to be a good bet.  Lower stops to $97.75 tonight, which is just 
above both the 10-dma ($97.39) and the 50-dma ($97.64).

Picked on September 25th at    $95.75
Change since picked:            -1.15
Earnings Date                10/22/03 (confirmed)
Average Daily Volume =          475 K
Chart =



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

None


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The Option Investor Newsletter                  Tuesday 09-30-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - RYL


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

The Ryland Group - RYL - close: 73.11 change: -1.82 stop: 69.50

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:
In case you haven't noticed, bond yields have been falling over 
the past couple weeks.  By Tuesday's close, the yield on the 30-
year bond was back under 4.9% for the first time since the middle 
of July.  This pullback in the long-term interest rates hasn't 
been lost on the Housing stocks, with the Dow Jones Home 
Construction index ($DJUSHB) working its way steadily higher in 
an ascending channel from the early August lows.  Today's 1.5% 
gain pushed the index to its best close since June 17th, and it 
looks like a test of the June high ($482) is coming up.  RYL has 
been trading very much in-line with the DJUSHB in recent weeks 
and today's 1.56% gain helped the stock to deliver its best close 
since mid-July.  The stock has been working higher in its own 
ascending channel and today it managed to close in the upper half 
of that channel for the first time in over a week.  Another 
encouraging sign is the way the 20-dma ($70.94) has been 
providing support over the past 5 weeks.

The PnF chart is clearly bullish, on a Buy signal, in a column of 
X and with a vertical count of $91.  We're not necessarily 
looking for that level to be reached in the near-term, but a 
breakout over the June/July highs seems likely.  In the past, RYL 
has had a tendency to make powerful and violent moves, but in the 
past few weeks, the gains have been more measured and in a two 
steps forward, one step back fashion.  That means the preferable 
way to enter the play will be to look for a pullback to support 
and enter on the rebound.  Another factor that argues against 
momentum entries right now is the way the stock was turned back 
today from the upper Bollinger band ($73.76) at the close.  
Target entries on a rebound from the 20-dma and look for a first 
target in the $77-78 area, near the June/July highs.  That will 
likely produce a round of profit taking ahead of our expected 
breakout over the $80 level.  Our stop is initially set at 
$69.50, just under both the bottom of the channel ($69.75) and 
the 30-dma ($69.59), both of which have provided consistent 
support in the past several weeks.

Suggested Options:
Shorter Term: The October 75 Call will offer short-term traders 
the best return on an immediate move, as it is just slightly out 
of the money.

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the January 80 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 January 75 Call.  There 
are November strikes available as well, but note that open 
interest is still very light.

BUY CALL OCT-70 RYL-JN OI=1261 at $4.60 SL=2.75
BUY CALL OCT-75 RYL-JO OI=1729 at $1.70 SL=0.75
BUY CALL NOV-75 RYL-KO OI=  25 at $3.50 SL=1.75
BUY CALL JAN-75 RYL-AO OI= 447 at $5.20 SL=3.25
BUY CALL JAN-80 RYL-AP OI= 409 at $3.30 SL=1.75

Annotated Chart of RYL:


 

Picked on September 30th at  $73.11
Change since picked:          +0.00
Earnings Date              10/21/03 (confirmed)
Average Daily Volume =        832 K
Chart =



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