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Daily Newsletter, Thursday, 10/02/2003

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The Option Investor Newsletter                 Thursday 10-02-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: A Round of Applause Please
Futures Markets: Central Bankers
Index Trader Wrap: Groping for gains
Market Sentiment: Count Down to Jobs


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      10-02-2003           High     Low     Volume Advance/Decline
DJIA     9487.80 + 18.60  9511.06  9427.65 1.53 bln   1900/1244
NASDAQ   1836.22 +  4.00  1842.55  1823.64 1.60 bln   1734/1401
S&P 100   511.20 +  0.87   512.14   507.77   Totals   3634/2645
S&P 500  1020.24 +  2.02  1021.87  1013.38 
W5000    9887.36 + 27.80  9900.72  9820.28
RUS 2000  503.20 +  2.88   504.25   499.76 
DJ TRANS 2743.67 +  7.30  2751.39  2727.75   
VIX        20.80 -  0.27    21.45    20.71   
VXN        31.25 -  0.08    31.70    31.08 
Total Volume 3,384M
Total UpVol  2,043M
Total DnVol  1,254M
52wk Highs  514
52wk Lows    23
TRIN       0.79
NAZTRIN    1.05
PUT/CALL   0.78
************************************************************

A Round of Applause Please

The October rally continued to the consternation of bears
everywhere. After the nearly +200 point gains on Wednesday
the Dow shook off some early weakness and rallied to tack on
another +18 points and close very near the 9500 resistance
level. The indexes traded on both sides of zero several times
during the day but the only score that matters is the one at
the final gun. Chalk a big one up for the bulls because they
held the high ground. 

Dow Chart


 
Nasdaq Chart


 

The Jobless Claims came in higher than expected but the pencil
pushers managed to slip it in just below 400K at 399,000. The
claims from last week were revised up +5,000 to 386k and that
is where they are likely to stay. The storm week will be chalked
up as an economic blip and this week will probably end up
revised over 400K next week. I can't remember off hand a drop
in a revision recently. They are all revised up. Continuing
claims rose again to 3.67 million and the highest level since
July. The multiple economic reports lately with declining
employment components and the rising continuing claims would
indicate future weakness in claims. The nonfarm payrolls on
Friday is expected to be weak as well. 

Factory Orders fell -0.8% and more than double the consensus
estimates of -0.3%. Nondurable Orders fell -0.51% and Durable
Orders fell -1.11%. Communications equipment fell to -4.89% 
from +11.78 in July and aircraft and parts to -2.50%, up from 
-13.89 in July. Computers dropped to +3.21 from +9.22 in July.
Industrial machinery rose +5.78 from -8.31 and was the strongest
component change. Still, a -0.8% headline number is a material
change from the +2.0% gain in July. This report showed that 
the economy is still expanding from the late 2001 lows but the
pace of expansion is very anemic. This report only represents
orders to U.S. factories and with the change to overseas
manufacturing it is hard to determine what the balance of
orders really reflects. 

For Friday the big report is the nonfarm payrolls. The official
consensus estimate is for a drop of -25,000 jobs. The whisper
numbers I have heard are as high as -100,000. This has set
the stock market up for a positive surprise or at least a
non event. If everybody expects worse than -25K then a -40,
-50 even -75K number could be met with a yawn. Ok, we knew 
that, so what else is new? Basically we spend a week posturing
in front of the release and then the outcome is ignored. 

The only other material release on Friday is the ISM non 
manufacturing Services Index. The consensus is 62.8 and a
decline from 65.1 in August and July. Services appear to 
have peaked in July/August and could be trending down if the
consensus numbers are correct. Since July/August were the
highest numbers posted since the creation of the index six
years ago any decline is likely to be ignored unless it falls
under 60. Any number over 60 represents a strong expansion
and a strong contribution to the GDP for the balance of the
year. If anything, the ISM Services represents the true state
of the economy. With more and more manufacturing done outside
the U.S. we are turning into a service economy. Unless there
is a disaster I expect this release to be spun to the bulls
advantage by analysts. 

IBM announced today that it was cutting 720 jobs and initially
lost ground in the market but recovered to down only -50 cents.
PSFT announced it was cutting 7% of its staff after completing
the merger with J.D. Edwards. That could be up to 1000 jobs
in an effort to save $207 million in 2004. PSFT also got signs
of a reprieve from the Oracle death sentence. The Justice Dept
is reportedly preparing a challenge to Oracle's hostile bid
for the company. This would end the attack and allow PSFT to 
breathe again. Many customers were reluctant to buy their
software because they were afraid Oracle would end up with
the company and force the customers into an Oracle solution. 

Techs got another sunburn today after a Merrill Lynch analyst
penned a scathing open letter to Sun Micro. The analyst said
SUNW had reached a point of crisis and was bloated, unfocused
and likely to suffer further loss of market share. He said
the company would dwindle into irrelevance and eventually be
bought for its installed user base. He said the SUNW CEO, 
Scott McNealy's brash and contrarian personality was getting
old and he needed to clean up his act. He suggested SUNW cut
5-7000 jobs and quickly, spin off Java and narrow its focus. 
SUNW fired back that the analyst did not understand the SUNW
business and if he had attended any of the Sun conferences
he would know what they were focusing on. They called the
attack a broken record and suggested the analyst try another
tune. SUNW finished the day down a nickel. 

There were rumors on the street today that the gains we saw
on Wednesday were partly due to a very large buy program 
by Goldman Sachs. They were said to be accumulating big cap
stocks all day for a large customer. There is no way to 
verify this rumor although it was mentioned on CNBC several
times. Also helping the markets was growth estimates by
MMM of +12% to +14% for 2004. 3M affirmed the prior estimates
and said the economy was showing signs of improvement. A DB
analyst said 3M was closer to the beginning of a high-growth
transformation than the end. 

These types of comments helped to maintain a bullish posture
in the markets on Thursday. News of the big buy program 
helped to give bulls confidence that big bets were still
being made at the beginning of the October tribulation 
period. This buying in front of the most volatile two weeks
of the year smells of the plunge protection team at work but
tracking them down is harder than getting evidence of aliens
on the X-Files. The PPT exists but the secrecy surrounding 
their actions is better than that surrounding Area-51 in
Nevada. 

The positive mood is contagious and the bulls pulled off 
a real trick by posting additional gains for the second 
consecutive day in October. Last year the first day of 
October saw a +340 point Dow gain and the 2nd day a -180
point loss leading to -743 points over the next seven days. 
We have successfully evaded the reversal drop so far but a 
two day string of gains is hardly a string. 

Regardless of the reason or the season the Dow did manage
to test strong resistance at 9500 a total of four times on
Thursday. While it failed each time it did not fail far. 
The Dow closed at 9488, only -12 points from the critical
level and stretching its move over the 50 DMA to +22 points.
The Dow closed less than 200 points from the September high
of 9686. A pretty convincing performance all things 
considered. 

The Nasdaq was far less exciting but still clung to positive
territory. After bouncing off the 50 DMA earlier in the 
week it rallied to close at 1836 with a +4 point gain but
still well off the 1913 52-week highs. The Nasdaq traded
in only a 19 point range and much of that range was early 
in the day. The SUNW attack and an earnings warning from 
NTIQ helped to restrain the eagerness to buy. Ironically
there were numerous upgrades to tech stocks and many with
new coverage started. Helping to restrain the gains were
technical considerations where stocks bouncing over the
last two days were nearing resistance again. With the high
profile SUNW warning this week there may be some rethinking
of the lofty expectations. 

The major hindrances to the current market are jobs, bonds
and valuations with many stocks at new highs on hopes of 
strong earnings. On Thursday 516 stocks hit new 52-week highs.
That was the highest level in over a week. While the jobs
number tomorrow is likely to be ignored it was a cloud over
the market today. Bonds sold off sharply at the open and 
gave back all the gains from the last two days. They did
improve slightly on the day but the continuing confusion
on foreign currency challenges, conflicting economic data
and tomorrows Jobs report had them on the run. Fed President
Moskow gave them the afternoon boost after saying the "job
market was weak despite an upturn in household data." Another
Fed President Santomero added to the worry saying "structural
unemployment was an ongoing worry." In the war of words 
Dallas Fed President McTeer while acknowledging weak jobs 
said "We can't keep having growth that fast (3Q) without 
producing job growth pretty soon." This positive outlook 
was the primary cause for the spike in yields at the open.
Not to be left out Ben Bernanke also said that "employment
was a major concern" for the Fed.

The September Jobs report will be the first look at a 
massive revision to previous payroll numbers as the Bureau
of Labor Statistics attempts to include data that falls 
outside the normal payroll sample. The revision is made 
each June but we could get the first clue with the Sept 
report and the initial revision data. Economists are 
hoping for an upward adjustment of +200,000 jobs over the
12 month period ending in June. The adjustment comes from
matching federal data with state unemployment filings. 

Personally, I think the barrage of Fed heads all speaking 
out on employment on a single day was an attempt to cushion
the blow for Friday's report. The Fed gets a 24-48 hour 
advance look at most reports and this literal barrage of 
employment comments on the same day sure appears to 
concentrated to be coincidental. Either way the report 
has been filed and the numbers will hit the wires at 8:30
tomorrow morning. The overnight futures are flat and it 
appears there is a lack of concern. Traders have either 
gone flat or placed their bets and we are waiting for the
cards to be shown. 

The problem that concerned me on Thursday was volume. The
combined volume was only 3.4 billion shares across all 
markets. This was the lowest volume on record since Sept-15th
and the day before the FOMC meeting. Just like that Monday we
are not seeing any rush to place bets. Traders are either
confident in their positions or flat. The lack of volume
is a problem for the bulls as it takes lots of volume to
overcome upward resistance. Tuesday and Wednesday were
examples of a complete direction change. On Tuesday there
was 4.1 billion shares, 3.1B down volume, 1.0B up volume
and the Dow lost -105, Nasdaq -37. Yesterday there was
4.0 billion shares, 3.1B up volume, 0.9 down volume and
the Dow gained +194, Nasdaq +45. Exactly opposite days
by volume. 

Market Breadth Last 30 Trading Days


  

People have been asking why the market is so hard to predict
lately. First, because it has not been following normal 
calendar trends. The second reason is the stall at the top. 
Since September 1st we have been trading in a narrow range
between 9400-9600 with the drop over the last week being the
only major move out of that range. Take a look at the sheet
above. It is the total market breadth for the last 30 days. 
Over the last 30 trading days over 110 billion shares have
changed hands and the total points gained in that period
was +61 on the Dow and +56 on the Nasdaq. Notice also the
huge shifts in up and down volume. One day there are 900M
in one direction and the next day it is over 3B. (The volume
columns are in millions) What you should derive from this
exercise is that when markets are at or near the top traders
are nervous. Both bulls and bears are afraid of that next
big move and they are quick to buy the dip or sell the top
and do it in a hurry. Note also the increase in the range 
of point swings as we near the top of the chart. If you do 
not like one days massive move just wait and it will reverse.
There is a lot of information in this sheet if you take the
time to review it. It tells the psychology of the market
without even looking at a real chart. 

I put this together for one reason. You can easily see the
increasing volatility and bipolar swings in the U/D volume.
Next week begins the two most volatile weeks of the year 
and the odds are good the numbers at the top two weeks from
now will be even more bipolar. Nobody knows which way we
are going or how far but the odds are we are going to be
moving fast and we are likely to cover the same ground 
more than once. Keep those seatbelts fastened!

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Central Bankers
Jonathan Levinson

With news of the dollar allegedly being played by central banks,
massive open market operations and speeches from the Fed, it’s 
becoming increasingly difficult to separate movements caused by 
supply and demand from those mandated by central policy.  Bonds 
declined today, the dollar waffled, gold drifted, and equities
advanced.

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




The US Dollar Index dived to new lows overnight, was saved from 
just below the 92.10 level, peaked at a lower high below 92.70, 
and was trading 92.45 as of this writing.  Once again, despite 
dollar weakness, December gold and silver futures traded in 
negative territory through most of the session. The Commodities 
Index (CRB) added just .28 to close at 244.56 led by crude oil, 
soybean and copper futures.


Daily chart of December gold


 

Ben Bernanke was out today discussing what his studies claim to 
be the minimal effect that Fed interest rate decisions have on 
the stock markets, and more particularly how rate hikes should 
not be sufficient to prick stock market bubbles.  I had 
understood that Al Green denied the existence of Fed-induced 
bubbles.  Either way, while the Bank of Japan and the Fed cannot 
seem to prop the dollar for longer than a few hours, gold seems 
to be easily sold, falling in dollar terms even as the dollar 
drops.  Note that the gold futures market is not particularly 
large, and with under 600 December contracts traded today, it 
doesn’t take big money to move it.  Gold was lower by 1.00 as of 
this writing, trading 384, despite strength in HUI and XAU which 
closed near their highs, up 2.07 at 198.83 and +1.27 at 92.90 
respectively. The uncertain oscillators appear to be rolling 
over, and in light of the substantial gains made by gold on this 
move, it continues to look iffy at current levels.  I write this 
despite feeling particularly bullish on gold in light of the 
ongoing dollar drama and what sounds like an increasingly shrill 
round of cheerleading from the Federal Reserve.

Daily chart of the ten year note yield


 

Ten year note futures got sold aggressively today but closed off 
their lows, with the TNX finishing higher by 7.7 basis points at 
4.009%.  The move is not as “clean” as one might hope, due to a 
large drain from the Fed via its open market operations.  27.75B 
in expiring multiple-term repurchase agreements were replaced 
with 16B for a net drain of 11.75B today.  Given the lack of 
damage done to equities despite last night’s technically 
overbought condition, one must assume that the redemptions were 
made via sales of treasuries.  Whatever the cause, the bottomy 
TNX made solid gains today, and given the oversold oscillators on 
the charts, today may prove to have been a good selling 
opportunity for bonds.


Daily NQ candles


 

It was a quiet, positive day for equities, noteworthy as it 
followed yesterday’s massive upside move.  NQ added 4 points or 
.30%, ES 3.50 or .34% and YM +36 or .38%.  Recall that the blast 
off in equities coincided with word on the wire that Japan was 
buying dollars again.  Whether part of today’s vertical moves 
were caused shorts covering, “bargain” hunters or residual buying 
from some of those central bank dollars, we do not know.  I 
suspect that it’s not the latter, as the .3% gains would have 
been 3% instead, for all the subtlety that the primary dealers 
tend to show.  

I’ve drawn what appears as a bullish descending wedge on the 
daily chart with today’s move constituting a trendline break.  
30 minute 20 day chart of the NQ.  This formation projects to the 
rally highs on a maximum fulfillment, but for now the oscillator 
trend remains lower.  Despite the strength today, no buy signal 
has yet been printed on this longer timeframe.

20 day 30 minute chart of the NQ


 

The 30 minute NQ reveals a slight bearish divergence on the 300 
minute stochastic, but it’s the own one of its peers with no such 
print on the ES or the YM.  The 300 minute stoch and the Macd 
both bottomed and reversed from higher lows, respecting uptrends 
both on the indicators and in price.  I note these facts first 
because my gut feeling is particularly bearish on equities, and I 
don’t want the bullish technical case to get forgotten.  The 
formation appears to be a bear wedge, and the upphase on the 
oscillators is seen within the context of an ongoing daily cycle 
downphase.  The volatility indices were green for much of today’s 
session, and the buying was not sufficiently strong to move the 
indices much more than sideways.  Whether my gut feel turns out 
to constitute a bullish “wall of worry” will have to be seen, but 
it’s difficult to imagine getting excited about owning the NQ 
here.  It felt today like much of the buying was from worried 
shorts. 

Daily ES candles


 

One might be tempted to observe that dollar weakness proved to be 
very bullish for stocks, bonds and commodities earlier this year.  
Our review of the money supply and subsequent news stories 
revealed that the money supply had increased during that time, 
and the theory is that this “hot” money was chasing everything 
with an offer.  While money supply may still be increasing, the 
price of all assets is not.  Equities have corrected, as is gold, 
and we saw the CRB dip below 240 last week.  Equities and 
treasuries are no longer rallying together.  In 2002, the 20% 
drop in the US Dollar Index was matched by a precipitous drop in 
equities.  Bernanke’s speech today sounded like a “don’t blame 
us” statement, but again, it could just be my own bias coloring 
my perception.

The ES looks stronger than the NQ again, and the reversal printed 
on the Macd fast line is matched by an upward twitch on the 10 
day stochastic.  It’s just a twitch, and not yet a signal, but 
it’s there.  More than half of the decline from the rally highs 
has been retraced by this rapid upmove.


20 day 30 minute chart of the ES


 

The upward reversal this afternoon caught many by surprise, 
including the oscillators on the 30 minute chart.  The reversal 
from much higher lows is bullish.  The upmove in price seems very 
steep, and the market seems to be struggling with the prospect of 
a trip to the upper trendline at 1026-7.  Current resistance at 
1020 is 61.8% above the 987.75 low.  A move to the 74.6% will 
attract sellers in droves, but for the moment, bears have been 
unable to complete even a 30 minute oscillator downphase.  
Tomorrow should resolve this afternoon’s gridlock one way or the 
other.  Longs at the lower trendline feel risky to me, and I’ll
be assessing shorts at resistance above or on a break of the 
steep lower trendline.


Daily YM candles


 

Once again, the YM resembles the ES most closely, nothing to add.

20 day 30 minute chart of the YM


 

The oscillators on the 30 minute charts have been working very 
well for the past weeks, but today’s reversal was a surprise as 
it happened.  I’m hoping for tomorrow to resolve the deadlock.  
An upward trending move would be counter to the current daily and 
weekly chart oscillator downtrends.  It would surprise many 
participants, which is its strongest recommendation, but the odds 
do not favor it.  See you at the bell!


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

Groping for gains

The major indices traded in a rather narrow range as California's 
gubernatorial candidate Arnold Schwarzenegger, and his past 
improprieties on "rowdy movie sets" more than a decade ago, 
received more coverage than the 0.8% decline in August factory 
orders and a weekly jobless claims report that continues to hover 
around the 400,000 level.  A level that economists say is the 
waterline for an improving or deteriorating job market.

The August factory orders news is considered "old" data these 
days where greater focus will be given to tomorrow's nonfarm 
payrolls data for September, where economists are forecasting the 
economy to have lost an additional 25,000 jobs in September, 
after losing 93,000 in August.  Perhaps the weekly 399,000 new 
filings for state unemployment claims, a smidge under the 400,000 
level, was enough to have the broader S&P 500 Index (SPX.X) 
1,020.24 +0.19% gaining 2-points by the close.

If economists' are correct in their monthly nonfarm forecasts it 
would be an 8th consecutive monthly decline for nonfarm payrolls, 
where a recovering U.S. economy would have lost 635,000 jobs in 
the past 8 months.

If today's trade lulled anyone to sleep, the get out those 
smelling salts, as you may want to be sharp tomorrow!

Tonight I want to lay out a little plan and build some 
observations that may help keep a trader calm, when before the 
opening bell, the markets are going to get September nonfarm 
payrolls, September unemployment rate (forecasted at 6.2%, up 
from August's 6.1%), September hourly earnings (forecasted +0.2% 
from August's +0.1%) and September's average hours worked per 
week (forecasted 33.7 hours from August's 33.6 hours).  

While I strongly suspect the pre-market economic reports will 
grab the day's headlines, at 10:00 AM EDT, ISM Services (non-
manufacturing) are forecasted at 63.0%, down from August's 65.1% 
reading.

There are two levels I think a trader might want to monitor 
tomorrow morning AFTER the all the payroll data is announced, in 
order to judge a market's response.

If by the cash open at 09:30 AM EDT S&P futures are holding above 
1,015.50, then I would have to hold a neutral to bullish bias.  
Below this level, the downside risk could immediately be found to 
1,007.80 and from there, 1001.80.  On the upside, a trade in the 
futures at 1,019.20 would be bullish in my opinion, where upside 
builds to 1,029.10.

Here's the layout for my DOWNSIDE, thoughts.  While I'm bullish 
at tonight's close, here's my thinking.  

December S&P futures (sp03z) - Daily Intervals


 

This is the same chart of the S&P futures (sp03z) we put together 
several weeks ago after the S&P 500 broke to new highs.  The 
reason I say I carry a bullish bias into tomorrow's session, is 
the ability of the futures to hold above 1,015.50.  If the MARKET 
is trading these levels, then it made some sense yesterday that a 
break higher at sp03z had upside to 1,015.50, the next level 
higher.  Right now, it makes sense that futures above 1,015.50 
has upside to 1,029.10.

With that chart in mind, where the blue retracement still give us 
further upside targets, if the S&P 500 decides it want to break 
to another 52-week high, lets look at a futures chart, and lets 
just pretend that the recent 52-week high is THE high for the 
next several months, and lets say that the recent high and 
Tuesday's low becomes a more critical near-term range, and use 
the more CONVENTIONAL approach to retracement.

Regardless of what retracement you use, make NOTE of 1,007 and 
1,029.

S&P futures (sp03z) - Daily Intervals


 

Here's the same S&P futures chart (sp03z), but this time I'm 
showing the more conventional use of retracement.  Even with this 
retracement, it would appear a bullish bias was carried into 
today's close, as this futures contract was able to close above 
1,019.20.  The little black tick you see as a bar, is tomorrow's 
session already underway.  Do you see some of the commonality at 
1,029 and 1,007 in the above chart, that also presents itself in 
the first chart, using our fitted retracement technique?

The reason I think there's a pretty good chance we could see a 
trade at 1,029 right now, and continues to be a test of early and 
mid-August is represented by the PINK circles I've drawn.  See 
how in August, when the S&P 500 rebounded from the 981 level, it 
traded 5 PINK circles higher, before it ever came back through 
(below) a prior level?  Today's trade and ABILITY to CLOSE 
1,019.20 would be a 4th level of upward trade.  This would be a 
pattern we might look for DUPLICATION.  

Follow that first pattern of PINK circles.  How many levels lower 
did it trade, before a new high was set.  I count 3.  But look at 
the CLOSE.  See how the futures never CLOSED below that 1,007.29 
level?  On an intra-day basis, the futures ALWAYS seemed to want 
to close above the third level lower and perhaps there was just 
too much demand still in place.  

The reason I have a RED lower arrow below 1,007 right now, is 
that we've only seen 4 upward levels traded, and a trade below 
and CLOSE below 1,007, would be DIVERGENCE of the August pattern.

I point this out, for one reason.  Some traders may be playing 
the SIMILARITY pattern from August based on the pivot levels.

Note that in the above chart, I've calculated the difference 
between today's S&P futures (sp03z) settlement, and the S&P 500 
Index (SPX.X) 1,020.24 cash close.

In tomorrow morning's 09:00 AM EDT update, I'll report what stock 
futures are doing at the time of writing and all you need to do 
is add about 0.64 to the futures number, to figure out where the 
cash will open at 09:30 AM EST.

Here's tomorrow's Pivot Matrix.  Remember.... 1,007 and 1,029.

Pivot Analysis Matrix -


 

OK... so 1,007 and 1,029 don't show up EXACTLY in the MATRIX, but 
I've highlighted some very close correlations, where within 2 or 
3 points, these two levels become rather important, and I think 
the SUPPORT levels and WEEKLY/MONTHLY pivots become VERY 
important tomorrow.

It would be my opinion that some of the slight softening in 
economic data will place GREAT emphasis on the nonfarm numbers 
tomorrow.

The scenario for gain to WEEKLY/MONTHLY R1's is if the nonfarm 
data comes anywhere close to economists' forecast, it may be just 
enough to get the bid higher and keep investors/traders hanging 
in their for one more week, where a bull gets his/her trade 
target of WEEKLY/MONTHLY R1.

However, a miss on the data may have some of last night's 
mentioning of trader talk that mutual fund managers are now 
playing more short-term moves, looking to pad buy side results 
with more modest gains, and we see the markets get "flushed" back 
lower, and thought begins to build that this rally is a failed 
rally, and the SPX gets pushed back below the WEEKLY/MONTHLY 
Pivots.

Where the futures come in, I think, is if things get flushed back 
lower, then a futures CLOSE below 1,007 then has our CASH MONTHLY 
R1s in play.

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


 

I received several e-mail from traders asking if we should 
"believe" the QQQ break above the WEEKLY/MONTHLY pivots, or even 
"believe" today's advance as it came on light volume.

Under the scenario that a bull plays the SIMILARITY of the August 
rally, the decline in volume might well be a good sign.  While 
today it is easier to say that in August, the QQQ may have simply 
been "sold out" and that the light volume rally was simply due to 
lack of sellers.

At some point, the QQQ will not lack sellers, but I thought a 
trader should trade the QQQ's long on today's move back above the 
WEEKLY/MONTHLY pivot resistance.  A jittery bull, like myself, 
could follow with a tight stop under today's low, especially if 
looking of any DIVERGENCE to the past, where in August, when the 
QQQ began its rebound, the QQQ didn't trade below a prior day's 
low until August 25, when the QQQ traded below its Friday, August 
22 session low of $32.33.

And a bullish stop under today's low, or even the recent lows 
might not be a bad idea as the NASDAQ-100 Bullish % ($BPNDX) saw 
a net loss of 2 stocks to a point and figure sell signal.  This 
has the bullish % falling 2% to 72%.  Still "bear confirmed."

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


 

I think traders should continue to notice the "distance" between 
the QQQ/NDX and its weekly/monthly pivot and the OEX/SPX/INDU and 
their WEEKLY/MONTHLY pivots.  

One shorter-term trader was "smart" and after having taken a 
bullish trade in the SPY yesterday, sold that trade and decided 
to rotate to the QQQ.  His thought was... "if they're going 
higher, why not play follow the leader."

That thought will be tested tomorrow.  The reason I think this 
was "smart" is that he at least booked a profit in one trade, and 
didn't overleverage to the bullish side.

Today's trade saw the narrower S&P 100 Bullish % ($BPOEX) see a 
net gain of 1 stock to a point and figure buy signal.  This has 
the bullish % edging up to 79%, but still reading "bull 
correction" status.  Right now, it would take a reading of 84% to 
have this bullish % reversing back up to "bull confirmed."

The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 0.2%, so 
a net gain of 1 stock to a point and figure buy signal was found.  
Still "bull confirmed" and edging back up to 77.2%.

Dow Industrials (INDU) Chart - Daily Intervals


 

The INDU came into our zone of near-term resistance and closed 
about as close to its now rounding flat 21-day SMA, without 
closing right on it we could possibly have imagined.  Today's 
trade was hardly that of a "rowdy movie set," but grab you 
popcorn and a soft drink, as I think tomorrow's trade has the 
potential of a quick hitting action film!

Today's trade saw a net gain of 1 stock to a point and figure buy 
signal as the very narrow Dow Industrials Bullish % ($BPINDU) 
rose 3.33% to 83.33%.  Still "bull correction" status and would 
take a reading of 86.66% to reverse back up to "bull confirmed", 
while a reading of 78% would be further internal deterioration to 
"bear confirmed" status.  Do you sense the range in the bullish % 
too?

Caterpillar (NYSE:CAT) $72.70 +1.90% was the Dow component and 
the OEX component and most likely the SPX component that gave the 
"buy signal."  Remember how CAT had achieved a prior bullish 
vertical count of $72, traded $73, then eventually gave a "sell 
signal" at $68?  It has now reversed back up on today's news it 
may be in line to win an Iraqi reconstruction bid.  Today's buy 
signal now has the stock building a bullish vertical count to 
$81, and this type of bullish count may indeed be a "new 
revelation" that has the MARKET thinking higher prices are in 
store for the CAT.

Jeff Bailey


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

Count Down to Jobs
-J. Brown

The markets hit the pause button as investors decided to wait and 
see what tomorrow's September jobs report will reveal.  
Economists are expecting the Labor Department's employment report 
to show the U.S. economy losing jobs for the eighth month in a 
row.  Current estimates, per a Bloomberg survey, are for a loss 
of 25,000 jobs last month and a jump in unemployment to 6.2 
percent, up from 6.1 in August.  Should this number come in 
significantly weaker than expected then look for turmoil in 
stocks as investors hit the sell button in a knee-jerk reaction 
to lock in profits.  If the report is positive, then it's off to 
the races as Wall Street heads into the Q3 earnings reporting 
season.  

Looking at today's action the overall mood was still somewhat 
optimistic as the major indices tended to drift higher into the 
afternoon.  The lack of profit taking on yesterday's big moves is 
encouraging.  Recent comments from the Chicago Federal Reserve 
President and the Dallas Federal Reserve President regarding 
strong growth for the U.S. economy for the remainder of this year 
and throughout 2004 helped soothe investors concerns.  


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

Market Averages

DJIA ($INDU)

52-week High:  9686
52-week Low :  7197
Current     :  9487

Moving Averages:
(Simple)

 10-dma: 9447
 50-dma: 9365
200-dma: 8705



S&P 500 ($SPX)

52-week High: 1040
52-week Low :  768
Current     : 1020

Moving Averages:
(Simple)

 10-dma: 1013
 50-dma: 1003
200-dma:  932



Nasdaq-100 ($NDX)

52-week High: 1406
52-week Low :  795
Current     : 1337

Moving Averages:
(Simple)

 10-dma: 1345
 50-dma: 1311
200-dma: 1150



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

It appears the recent rise in the volatility indices was a 
false alarm.  Both have rolled back over as the markets rebound
from Tuesday's lows.

CBOE Market Volatility Index (VIX) = 20.80 –0.27
Nasdaq Volatility Index (VXN)      = 31.25 –0.08

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.77        495,796       384,012
Equity Only    0.55        386,713       213,906
OEX            1.53         16,855        25,892
QQQ            0.67         25,310        17,140


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

Bullish Percent Data

           Current   Change   Status
NYSE          72.0    + 0     Bull Confirmed
NASDAQ-100    72.0    - 3     Bear Confirmed
Dow Indust.   83.0    + 3     Bull Correction
S&P 500       77.2    + 1     Bull Confirmed
S&P 100       79.0    + 1     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  1.20
10-Day Arms Index  1.34
21-Day Arms Index  1.25
55-Day Arms Index  1.07


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    1698      1676
Decliners    1109      1372

New Highs     228       149
New Lows       12        12

Up Volume    988M      829M
Down Vol.    496M      730M

Total Vol.  1521M     1593M
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                 Thursday 10-02-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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

None


PUTS:
*****

Johnson Controls - JCI - cls: 97.60 chng: +0.95 stop: 97.75

We'll have to chalk this one up to a stock that just doesn't 
want to drop.  As soon as it gave us our PnF Sell signal by 
breaking under $95, the bulls came tearing back with volume 
running strong.  We maintained a fairly wide stop to allow for 
this sort of volatility, but it wasn't enough, with our $97.75 
stop (more than $4.50 above Monday's low) being tagged early in 
the session.  The stock did close below that level by a small 
amount, but there just wasn't enough weakness to warrant 
continuing to lean to the bearish side right now.  Use any 
opening weakness on Friday to gain a more favorable exit.

Picked on September 25th at    $95.75
Change since picked:            +1.85
Earnings Date                10/22/03 (confirmed)
Average Daily Volume =          486 K
Chart =



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

Amazon.com - AMZN - close: 50.09 change: +0.97 stop: 47.25*new*

Continuing its bullish pattern, AMZN caught a strong bounce 
yesterday from support at the 20-dma (currently $47.73), which 
was just below the mid-line of the rising channel.  Despite the 
lackluster trade in the broad market today, the stock tacked on 
nearly 2% to squeak out a close back over the $50 level.  Now 
the top of the channel has risen enough to give us a decent shot 
at next resistance at $52.  Dip buyers that took advantage of 
the rebound yesterday got a great entry point and it should now 
be safe to raise stops to $47.25, which will be below the 
supportive 30-dma (currently $47.20) by tomorrow.  This moving 
average hasn't been violated on a closing basis since late July, 
so if it is violated, we'll know this bullish run is over.  But 
right now, the bulls definitely are in charge.  Conservative 
traders may want to harvest some gains on a move near $52, but 
we're going to hold out for a push up to our aggressive $55 
target ahead of earnings in a little over 2 weeks.

Picked on September 18th at  $47.89
Change since picked:          +2.20
Earnings Date              10/21/03 (unconfirmed)
Average Daily Volume =     9.02 mln
Chart =


---

Apollo Group - APOL - close: 67.95 chg: -0.22 stop: 64.75*new*

APOL looks ready for its next leg higher.  The stock enjoyed a 
nice bounce from the $65 level with the markets big surge on 
Wednesday.  Traders who took advantage of the dip to $65 should 
be looking good and traders who waited for a move over $67 now 
have an opportunity to gauge a new entry.  We would have liked to 
have seen volume really confirm the bounce but volume has been 
fading, which is normally not a bullish sign.  We are raising our 
stop loss to $64.75.  Given the expectation for a strong quarter 
we might actually witness a pre-earnings ramp up.  APOL should 
announce on Oct. 7th.

Picked on September 16 at $68.45
Change since picked:      - 0.50
Earnings Date           10/07/03 (confirmed)
Average Daily Volume:        1.9 million 
Chart =


---

Exelon Corp. - EXC - close: 64.65 change: +0.05 stop: 61.75*new*

Didn't we say EXC was unlikely to be a fast-moving play?  Well, 
maybe we erred on the side of conservatism, as this staid 
Utility stock is really tearing up the chart so far.  Starting 
with Monday's breakout, this has been a very bullish week for 
the stock, helped along by the strong action in the Utility 
Sector index (UTY.X), which is closing in on strong resistance 
in the $295-300 area.  EXC is looking a bit extended right here, 
as price is above both the upper Bollinger band and the top of 
its rising channel with daily Stochastics starting to flatten 
out in overbought territory.  That doesn't mean it can't head 
higher, just that a bit of consolidation may be necessary first.  
For traders still looking to enter the play, we're only 
comfortable suggesting pullback entries near $63 (both the 
center of the rising channel and a re-test of broken 
resistance).  Note that we've raised our stop to $61.75, just 
below the 20-dma.  Should EXC break higher from here, harvesting 
some gains in the $66-67 area would be a prudent move.

Picked on September 28th at  $62.64
Change since picked:          +2.01
Earnings Date              10/28/03 (unconfirmed)
Average Daily Volume =     1.17 mln
Chart =

---

The Ryland Group - RYL - cls: 78.65 chng: +0.77 stop: 74.00*new*

Talk about your impeccable timing!  No sooner than we added 
bullish coverage of RYL, than the whole Housing sector exploded 
to the upside yesterday, with the $DJUSHB index tacking on more 
than 6%. No slacker, RYL delivered it own 6.5% advance.  The 
stock gave us one fleeting opportunity at a solid entry with the 
opening dip to $72.65 before really turning on the afterburners.  
Proving that those gains weren't a fluke, the stock advanced a 
bit further on Thursday, ending at another new all-time closing 
high.  There's still the possibility of some resistance at $79 
(the July intraday high).  As a measure of just how strong the 
buying pressure has been, today RYL found SUPPORT at the upper 
Bollinger band.  That's right, the stock spent the entire day 
outside the Bollinger bands, which is a rather uncommon 
occurrence.  RYL is feeling a bit frothy here after yesterday's 
sharp gain, but we don't want to rush out of the play with 
buying volume running so strong.  But we clearly can't advocate 
initiating new positions at this altitude.  In fact, 
conservative traders might be wise to harvest some gains here or 
tighten stops to $76.90 (just below today's intraday low) and 
then look for a re-entry on a dip and rebound near $75.  We're 
still anticipating a breakout above $80, so we're cautiously 
raising our stop to $74 tonight.

Picked on September 30th at  $73.11
Change since picked:          +5.54
Earnings Date              10/21/03 (confirmed)
Average Daily Volume =        835 K
Chart =


---

Schlumberger Ltd. - SLB - cls: 49.67 chng: +0.19 stop: 
48.00*new*

Here we go again!  By the close of trading, SLB was looking like 
it was headed south with its close below the ascending 
trendline.  But in a miraculous recovery, the stock was buoyed 
by the broad market action and it is right back at that pesky 
$49.75 resistance from which it broke out in the middle of 
September.  Another breakout over that level looks like a viable 
entry opportunity, with a rejection likely to create problems.  
The stock is still building a pattern of higher lows and higher 
highs and as long as that pattern remains intact, then the bulls 
should keep smiling.  Because of the last pullback below the 
ascending trendline, we're not advocating pullback entries at 
this time.  SLB needs to prove its bullish intentions for us to 
add more capital to the play.  Raise stops to $48.00, which is 
just below Tuesday's intraday low.

Picked on September 21st at  $50.99
Change since picked:          -1.32
Earnings Date              10/21/03 (unconfirmed)
Average Daily Volume =     3.16 mln



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

Caterpillar Inc - CAT - close: 72.70 chg: +1.36 stop: 67.50

Company Description:
For more than 75 years, Caterpillar Inc. has been building the 
world's infrastructure and, in partnership with its worldwide 
dealer network, is driving positive and sustainable change in 
every continent. With 2002 sales and revenues of $20.15 billion, 
Caterpillar is a technology leader and the world's leading 
manufacturer of construction and mining equipment, clean diesel 
and natural gas engines and industrial gas turbines.
(source: company press release)

Why We Like It:
There appears to be a lot of positives being reflected in CAT's 
stock price.  The recent ISM data reassured investors that the 
manufacturing sector was still expanding for its third month in a 
row.  Analysts are still suggesting investors look to cyclicals 
to benefit from the pick up in economic activity.  CAT 
shareholders are also eager to find out if CAT will be awarded a 
major contract to the U.S. government for power generators to 
rebuild Iraq.  The latest news, regarding the potential contract, 
hit the wires today and contributed to CAT's breakout of its 
trend of descending highs.  

CSFB's analyst John McGinty said the potential deal could be 
worth 25 to 30 cents a share to CAT's earnings for 2004.  Details 
were muddy but the expectation is for an announcement sooner 
rather than later.  He reiterated his "out perform" and $79 price 
target for the stock.  Meanwhile, we really like the technical 
breakout for CAT.  MACD took a long time to drift back from 
overbought and today's move helped create a fresh buy signal.  
The stock's stochastics, RSI and momentum oscillators all look 
positive as well.  Today's jump even created a fresh buy signal 
on its point-and-figure chart (see below).  We're going to target 
the $79-80 level and start the play with a stop at $67.50 (the 
recent low).  More conservative traders might be able to sneak by 
with a stop closer to $69.00.  Earnings are in two weeks so we 
might actually see some pre-earnings momentum.

Suggested Options:
Short-term traders can look at the October and November strikes, 
while those investors who enjoy a little more time can evaluate 
the January's.  We like the 70's and 75's and would probably play 
the Novembers.

BUY CALL OCT 70 CAT-JN OI=7034 at $3.60 SL=1.75
BUY CALL OCT 75 CAT-JO OI=3610 at $0.85 SL= --
BUY CALL NOV 70 CAT-KN OI=2966 at $4.60 SL=2.30
BUY CALL NOV 75 CAT-KO OI=1311 at $1.95 SL=0.95
BUY CALL NOV 80 CAT-KP OI= 387 at $0.70 SL= -- speculator
BUY CALL JAN 70 CAT-AN OI=8348 at $6.00 SL=3.75
BUY CALL JAN 75 CAT-AO OI=5101 at $3.40 SL=1.65
BUY CALL JAN 80 CAT-AP OI=1136 at $1.65 SL=0.85

Annotated Chart:

 

Picked on October 2 at $72.70
Change since picked:   + 0.00
Earnings Date        10/16/03 (confirmed)
Average Daily Volume:    2.9 million 
Chart =
 


---

United Technologies - UTX - cls: 80.45 chg: +0.57 stop: 77.00

Company Description:
United Technologies Corp., based in Hartford, Connecticut, is a 
diversified company that provides a broad range of high 
technology products and support services to the building systems 
and aerospace industries.  Its four main business segments are 
Otis, Carrier, Pratt and Whitney, and Flight Systems.
(source: company press release)

Why We Like It:
It's back!  We're adding UTX back to the call list because it 
finally looks finished with its consolidation between $77 and 
$80.50.  Fundamentally, the company should benefit from the 
economic expansion in the manufacturing sector as evidenced from 
the ISM report earlier this week.  The stock didn't react to last 
week's multiple-broker downgrade of the defense sector.  
Technically, we like the new relative high and breakout over the 
$80.50 level (okay, it closed back below it by a nickel).  The 
stock's MACD has drifted back from overbought and looks ready to 
print another buy signal.  Plus, there are just two weeks left 
before its earnings report and we might actually see some pre-
earnings momentum.

Our first target will be the old highs near $87.  We'll start the 
play with a stop at $77 and look to raise it as shares progress 
higher.  More conservative traders may want to wait for a little
more confirmation with a move over today's high.


Suggested Options:
There are just two weeks before UTX's earnings and we don't plan 
to hold over the report, which means traders could use the 
October calls, but they remain higher risk. We're going to 
suggest trading the Novembers.

BUY CALL OCT 75 UTX-JO OI= 489 at $6.30 SL=4.00
BUY CALL OCT 80 UTX-JP OI=2604 at $2.20 SL=1.10
BUY CALL OCT 85 UTX-JQ OI= 973 at $0.45 SL= -- pretty risky
BUY CALL NOV 75 UTX-KO OI=2145 at $7.00 SL=4.50
BUY CALL NOV 80 UTX-KP OI=1591 at $3.40 SL=1.75
BUY CALL NOV 85 UTX-KQ OI= 424 at $1.15 SL= --


Annotated Chart:


 

Picked on October 2 at $80.45
Change since picked:   + 0.00
Earnings Date        10/16/03 (confirmed)
Average Daily Volume:    1.9 million 
Chart =
 


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PLAY UPDATES - PUTS
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Cabot Microelect. - CCMP - cls: 55.13 chng: -0.32 stop: 58.25

The perfect picture of relative weakness, shares of CCMP just 
keep falling lower and lower.  This is in spite of the fact that 
the Semiconductor index (SOX.X) found support and rebounded over 
the past couple sessions.  We expected the stock to find some 
support in the $55-56 area, but the resilience of support in 
this area has been a bit surprising.  Even the intraday dips 
below $55 have found buyers over the past two days.  But with 
nothing on the chart to indicate any strength, we'll continue to 
ride it lower as long as the pattern of weakness prevails.  
Aggressive traders can consider adding to current positions on 
another failed rebound below $57, but we'd be hesitant to chase 
a breakdown lower with next support at $52.50.  In fact, we'd 
suggest harvesting some gains in that area, especially if 
reached ahead of the weekend.  For now, we're maintaining our 
stop at $58.25.

Picked on September 23rd at    $59.05
Change since picked:            -3.92
Earnings Date                10/23/03 (unconfirmed)
Average Daily Volume =          770 K
Chart =


---

Gilead Sciences - GILD - close: 58.89 chg: +2.10 stop: 60.01     

Uh-oh!  We've been cautious on GILD the last three days after its 
big intraday bounce and today's move makes us even more cautious.  
Thursday's pop higher also erases most of the short-term gains 
for this bearish play.  Two weeks ago, JPM downgraded GILD and 
started the mid-September drop.  Soon after JPM's downgrade, 
Merril Lynch came out defending the stock and now they're doing 
it again.  GILD's 3.7% gain today was fueled by MER raising its 
earnings estimates for the company on its Viread (HIV treatment) 
growth prospects.  The stock remains under resistance at $60 but 
many of its oscillators are turning bullish again.  We considered 
closing the play but since it's currently a little better than 
break even, we're going to let it ride with the stop at $60.01.  
No new bearish entries are suggested.

Picked on September 16 at $59.40
Change since picked:       -0.51
Earnings Date           07/31/03 (confirmed)
Average Daily Volume:       3.31 million  
Chart =


---

I T T Industries - ITT - cls: 61.09 chg: -0.11 stop: 62.51

Headlines continue to be sparse for ITT but the company did win 
another $15 million contract from the Defense department on 
Wednesday.  Yet we doubt it had any affect on yesterday's gain, 
which was probably market related.  Bears should be cautious.  
The rally yesterday put ITT back above its simple 200-dma and 
we're seeing a very short-term trend of higher lows.  This is not 
good news and with the market's excessive bullishness we could 
see ITT continue to drift higher.  We would not suggest any new 
bearish positions in ITT until the stock trades back below the 
$60 mark.  If ITT continues its bounce tomorrow we'll probably 
close the play in the weekend newsletter.

Picked on September 28 at $59.64
Change since picked:       +1.45
Earnings Date           07/28/03 (confirmed)
Average Daily Volume:        546 thousand 
Chart =



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The Option Investor Newsletter                  Thursday 10-02-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - CAT
Traders Corner: Get The Itching Powder – It's That Time Of The 
     Month


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

Caterpillar Inc - CAT - close: 72.70 chg: +1.36 stop: 67.50

Company Description:
For more than 75 years, Caterpillar Inc. has been building the 
world's infrastructure and, in partnership with its worldwide 
dealer network, is driving positive and sustainable change in 
every continent. With 2002 sales and revenues of $20.15 billion, 
Caterpillar is a technology leader and the world's leading 
manufacturer of construction and mining equipment, clean diesel 
and natural gas engines and industrial gas turbines.
(source: company press release)

Why We Like It:
There appears to be a lot of positives being reflected in CAT's 
stock price.  The recent ISM data reassured investors that the 
manufacturing sector was still expanding for its third month in a 
row.  Analysts are still suggesting investors look to cyclicals 
to benefit from the pick up in economic activity.  CAT 
shareholders are also eager to find out if CAT will be awarded a 
major contract to the U.S. government for power generators to 
rebuild Iraq.  The latest news, regarding the potential contract, 
hit the wires today and contributed to CAT's breakout of its 
trend of descending highs.  

CSFB's analyst John McGinty said the potential deal could be 
worth 25 to 30 cents a share to CAT's earnings for 2004.  Details 
were muddy but the expectation is for an announcement sooner 
rather than later.  He reiterated his "out perform" and $79 price 
target for the stock.  Meanwhile, we really like the technical 
breakout for CAT.  MACD took a long time to drift back from 
overbought and today's move helped create a fresh buy signal.  
The stock's stochastics, RSI and momentum oscillators all look 
positive as well.  Today's jump even created a fresh buy signal 
on its point-and-figure chart (see below).  We're going to target 
the $79-80 level and start the play with a stop at $67.50 (the 
recent low).  More conservative traders might be able to sneak by 
with a stop closer to $69.00.  Earnings are in two weeks so we 
might actually see some pre-earnings momentum.

Suggested Options:
Short-term traders can look at the October and November strikes, 
while those investors who enjoy a little more time can evaluate 
the January's.  We like the 70's and 75's and would probably play 
the Novembers.

BUY CALL OCT 70 CAT-JN OI=7034 at $3.60 SL=1.75
BUY CALL OCT 75 CAT-JO OI=3610 at $0.85 SL= --
BUY CALL NOV 70 CAT-KN OI=2966 at $4.60 SL=2.30
BUY CALL NOV 75 CAT-KO OI=1311 at $1.95 SL=0.95
BUY CALL NOV 80 CAT-KP OI= 387 at $0.70 SL= -- speculator
BUY CALL JAN 70 CAT-AN OI=8348 at $6.00 SL=3.75
BUY CALL JAN 75 CAT-AO OI=5101 at $3.40 SL=1.65
BUY CALL JAN 80 CAT-AP OI=1136 at $1.65 SL=0.85

Annotated Chart:

 

Picked on October 2 at $72.70
Change since picked:   + 0.00
Earnings Date        10/16/03 (confirmed)
Average Daily Volume:    2.9 million 
Chart =
 


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

Get The Itching Powder – It's That Time Of The Month

By Mike Parnos, Investing With Attitude

Two weeks left until expiration.  It's that time of the month when 
traders are itching to trade.  It's either that or body lice.  
Let's assume it's the former.  If it's the latter, you've got a 
more serious problem than trading boredom.

Email volume tends to pick up this time of the month.  Traders are 
lonely, bored, horny or all of the above.  Maybe you don't have 
enough TV stations and you've seen that episode of "Murder She 
Wrote" four times. Maybe your dog buried your remote control in 
the backyard.

I empathize, but that's no reason to trade.  Patience, my 
children.  Patience.  Time is working for us.  Remember, at the 
CPTI, we're the casino.  We're going to win most of the time.  
Premium is eroding away and finding its way into our pockets.  So, 
get some itching powder, take a cooking class, do some yoga, eat 
another pizza – do whatever is necessary to scratch that itch – 
but DON'T trade just for the sake of trading.  If you need some 
action, call a 900 number.  It's cheaper than making a bad trade.
_________________________________________________________________

Hi Mike, 
I am new to OI and so far I have been enjoying all the content, 
specially your CPTI approach. Would you mind explaining the 
"Joined" Iron Condor with maximum risk to maximum reward scenario. 
What is the best and the worst that can happen in an Iron condor? 
Thanks.  Sameer

Hi Sameer,
Thanks for the kind words.  Glad you're benefiting from my column.  
A "Joined" Condor consists of a bull put spread and a bear call 
spread with the sold puts and calls being at the same strike 
price.  For example, IBM is trading at $89.45 and we believe it 
will stay near $90 for the next few weeks.
 
We would sell the Oct. $90 put for $2.55 and sell the Oct. $90 
call for $2.10 -- a total of $4.65.  We would buy (for protection) 
the $100 call for $.15 and the $80 put for $.30 -- a total of 
$.45.   The total credit would be $4.20.  The closer IBM finishes 
to $90 at expiration, the more of the $4.20 you get to keep.
 
Your exposure is the 10-point difference in the spreads less the 
$4.20 credit = $5.80.  That's the worst that could happen, but we 
would never allow it to get to that point.  We would exit the 
position if IBM traded above $94.20 or below $85.80 -- and the 
loss would likely be only a few dollars.
 
With the regular Iron Condor, we would establish a range by 
selling the $85 puts and buying the $80 puts for a credit of 
$.50.  Then we would sell the $95 calls and buy the $100 calls for 
a credit of $.40.  The total credit would be $.90.  We would keep 
the $.90 if IBM finishes anywhere between $85 and $95.  With the 
Iron Condor, your exposure is the 5-point difference in the spread 
less the $.90 credit = $4.10.
_____________________________________________________________

Hi Mike
One question I have been meaning to ask on your Iron Condors.  If 
a stock goes thru one of the sell strikes, do you also close out 
the long or just the short?
 
Example:  COF.  Short Option: Sept. $55 call.  Long option: Sept. 
$60 call.
COF goes to $55.65, so we close the short...do you also close the 
long or leave it open?  I have been closing it as well, but not 
sure that is the correct way. Thanks again.  Gary

Hi Gary,
You have to decide if you think the stock (COF) has established a 
new trend and if you believe it will continue beyond the short 
call.  If it's early in the option cycle, and you believe the 
stock will continue, you can hold onto the long.  If you're right, 
and the stock moves to $65, your long call will have an intrinsic 
value of at least $5.00.  But that's IF YOU"RE RIGHT!  

You're risking the entire value of the long call – which should be 
significant if it's still early in the cycle.  Remember, that at 
the CPTI, we try NOT to pick a direction – or risk very little if 
we do.

Another situation is if you will only receive a nickel or dime if 
you sold the long call.  For that amount, it might be worth a 
flyer that the stock will spike up.  Financial stocks 
traditionally don't spike up, so it probably would not be a good 
idea with COF.  However, if you were dealing with a long put, 
leftover from a bull put spread, you might consider keeping it.  
Why?  Because bad news can cause a stock to tank significantly – 
financial or otherwise.
_____________________________________________________________

OCTOBER POSITIONS
October Position #1 – SPX Iron Condor – Trading @ 1020.24
We were going to create an Iron Condor with a range of 995-1075 
and take in $2,300 in premium.  However, on the Monday following 
expiration Friday, the SPX gapped lower.  So, we adjusted our 
condor to take the gap into consideration.  We created the Iron 
Condor with a new range is 980-1065. 

We sold 10 contracts of the October 980 puts and also sold 10 
contracts of the October 1065 calls.  Then we bought our 
protection in the form of 10 contracts of the October 970 puts and 
10 contracts of the October 1075 calls.  

We took in a total of $2,300 in premium and that's our maximum 
potential profit.  Our maximum profit range is 980 to 1065.  Our 
safety range is 977.70 to 1077.30.  We're at 1020.24, right in the 
middle of our Iron Condor position – a nice place to be.

October Position #2 – QQQ – Put Calendar Spread – Trading @ $33.26
We decided to risk a buck.  Since many folks think the market is 
due to correct.  So we created a cheap play that will let us take 
advantage of a nice down move.

We bought 10 contracts of January 04 QQQ $32 puts and sold 10 
contracts of October 03 QQQ $32 puts for a total debit of $1.00 
($1,000).
If/when the QQQs make their move down, the January $32 put will 
increase in value more rapidly than the October $32 put.  We'll 
look for a $500-$750 profit on this position and take the money 
and run.  The risk is small.  The percentage profit potential is 
very appealing.  This week the market moved down nicely.  Another 
few points down for the QQQs and we'll be in healthy profit 
territory.

October Position #3 – FDC (First Data Corp.) "Joined" Condor – 
Trading at $40.25.
We selected FDC, a financial stock, because is may be less 
vulnerable volatile movements of the tech stocks.  We're going to 
sell 10 contracts of the October FDC $40 calls and sell 10 
contracts of the October FDC $40 puts for a total credit of $2.40 
($2,400).  Then, for protection, we'll buy 10 contracts of the 
October FDC $45 calls and 10 contracts of the October FDC $35 puts 
for a total debit of $.30 ($300).  Our total net credit is $2.10 
($2,100).

Our profit range is $37.90 to $42.10.   The closer FDC finishes to 
$40, the more profit we will make.  The parameters of our profit 
range are also our bailout points.

October Position #4 – INTC (Intel Corp.) "Joined" Condor – Trading 
at $28.62.
We're going to sell 10 contracts of the October INTC $27.50 calls 
and sell 10 contracts of the October INTC $27.50 puts for a total 
credit of $2.10 ($2,100).  Then, for protection, we'll buy 10 
contracts of the October INTC $32.50 calls and 10 contracts of the 
October INTC $22.50 puts for a total debit of $.20 ($200).  Our 
total net credit is $1.90 ($1,900).

Our profit range is $25.60 to $29.40.   The closer INTC finishes 
to $27.50, the more profit we will make.  The parameters of our 
profit range are also our bailout points.

OEX – Bearish Calendar Spread – OEX @ $511.20
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.  The Sept. 470 puts obviously expired worthless.  We were 
going to sell the October 490 puts and take in another $2.10.  
However, with the Monday market gap-down, we were able to take in 
$3.10 instead.  Our new cost basis is $5.30.

QQQ ITM Strangle – Ongoing Long Term -- $33.26.
We bought 10 contracts of the 2005 QQQ $39 puts @ $7.00 = $7,000 
and also bought 10 contracts of the 2005 QQQ $29 calls @ $7.30 = 
$7,300 for a total debit of $14,300.  Then we sold 10 contracts of 
the QQQ Oct. 33 puts @ $.85 = $850 and also sold 10 contracts of 
the QQQ Oct. 34 calls @ $1.05 = $1,050 for a total credit of 
$1,900.

HPQ (Hewlett Packard) Bear-Put Spread – HPQ at $19.52.
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.  We'd gladly accept a 
profit of $800-900 and close the position early if the opportunity 
presents itself.  This is a long-term position.
__________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have 
questions about our educational plays or our strategies?  The 
OptionInvestor archives offer a wealth of information – from my 
columns to past and present informational and educational columns 
by my OI colleagues. 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


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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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