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Daily Newsletter, Tuesday, 10/07/2003

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The Option Investor Newsletter                 Tuesday 10-07-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bears on the Run
Futures Markets: New Dollar Lows
Index Trader Wrap: Total recall
Market Sentiment: Bulls 5, Bears 0


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      10-07-2003           High     Low     Volume Advance/Decline
DJIA     9654.61 + 59.60  9654.61  9536.02 1.56 bln   1899/1260
NASDAQ   1907.85 + 14.40  1907.88  1878.59 1.82 bln   1906/1281
S&P 100   519.64 +  2.60   519.64   513.05   Totals   3805/2541
S&P 500  1039.25 +  4.90  1039.25  1026.19 
W5000   10090.78 + 50.50 10090.78  9968.80
RUS 2000  520.77 +  4.05   520.78   513.56 
DJ TRANS 2800.38 +  3.70  2803.26  2774.82   
VIX        19.41 -  0.10    20.14    19.40   
VXN        29.30 -  0.12    30.17    29.15 
Total Volume 3,625M
Total UpVol  2,521M
Total DnVol  1,045M
52wk Highs  731
52wk Lows    15
TRIN       0.88
NAZTRIN    0.58
PUT/CALL   0.83
************************************************************

Bears on the Run

Not believing their eyes the bear population is running for
cover. Seeing the indexes at 52-week highs as October earnings
begin is such a contradiction of events that unbelieving bears
continue to short and continue to get trampled by the bulls. 
The last gasp may have been seen today with the stop at the
contract highs on the futures. An upward break on Wednesday
could be the bears signal to head for a warm cave for the 
next few months.  

Dow Chart


 
Nasdaq Chart


 

The morning started calm enough with the weekly Chain Store
Sales rising +1.3% on the strength of early Halloween sales.
The date for reporting September sales is this Thursday and
we are expecting to see sales fall from their August levels.
Competition is reducing prices and making gains in total
dollar volume difficult. The stores may be selling more items
but they are getting less for them. Wal-Mart is killing all
the categories including food. There are no more tax checks
in the pipeline and cash is going to be tight through the
holidays. 

August Consumer Credit rose +$8.2 billion compared to 
estimates of only $5.8 billion and $6.1 billion in July. The
gains were driven by the continued zero interest on auto loans
and a new component of student loans. This was the first month
that loans made by Sallie Mae or directly by the government
were included in the totals. Despite the gains in the headline
number the overall pace of credit is growing at the slowest 
pace in a decade. 

Ten Year Yield Chart


 

The market opened down today on worries over the weak dollar
but when the drop did not intensify investors rushed in to
buy the dip. The markets traded all over the charts but did
not make a major directional move until 2:PM. Bonds closed
down with ten year yields rising to 4.24% at the close. The
dollar fell to a three month low on global worries about the
deficit. The government is selling another $71 billion in
notes this week and that supply is also depressing bonds. 
A fall in the dollar can cause cash to flow out of stocks
and back overseas to avoid a greater currency translation
loss in the future. On the flip side a lower dollar helps
increase profits for U.S. corporations. A slow decline would
help stocks but a rapid decline would accelerate investing
decisions by foreigners and could hurt the market. The 
dollar dropped under 110 Yen and the U.S. Dollar Index fell
to 91.91. The index is only a couple of points from its
June lows and should that fail it could get ugly. The lack
of an intervention against the Yen at 110 was also a worry.
That level was defended last week by Japan. Traders fear
that should Japan stop buying dollars to keep the Yen from
rising then they may stop buying treasuries as well. A break
under the June lows could setup a test of the 1995 lows
in the low 80s and ripple currency on a global basis. 

US Dollar Index Chart


 

The markets are continuing their stealth rally but some of
the camouflage started coming off this afternoon. Since the
big move last week to punctuate this five day winning streak
the markets have moved up slowly as they consolidated those
big gains. Each day had moments of doubt where the averages
traded down just enough to give bears confidence to short
before bulls slowly increased their positions. The result 
was another round of short covering. The Dow spent almost
an hour at the 9550 level this morning (-50) and after a 
late morning rebound it retraced once more to test it again.
That was just in case there were some bears not yet convinced
to short the five days of gains. Once the bears jumped on 
the train it was derailed by the bulls and went vertical 
at 2:PM. The Dow closed only five points from the 52-week
closing high at 9659. The Nasdaq closed at 1907 and only 
two points from its 52-week closing high. 

These gains are simply amazing for multiple reasons. First
they are coming in a typically bearish period. Secondly 
because of the magnitude. The five-day string for the Dow
is now up +379 points and the Nasdaq +117. These gains in
front of imminent earnings are also incredible. It brings
back memories of the bubble years where investors bid up
stocks in front of earnings expecting outstanding results.
Those outstanding results better appear or trouble will be
in our future. Analysts are positively giddy about the 
potential for Q3. The earnings warnings season has closed
and other than SUNW there were no really high profile
companies and very few announcements. This has prompted
analysts to raise estimates again only a day before the
earnings flood begins. According to First Call this is the
first quarter since Q2-2000 that earnings were revised up
this close to the announcements. They have jumped from 
Q3 and Q4 and are now upgrading Q1. The Q1 estimates rose
from +13% to +16%. That may sound anemic compared to the
estimates of +20% for Q3 and +26% for Q4. That is because
the year over year comparisons become much harder once you
get to 2004. For 2003 we are comparing against a lackluster
2002 that was still in a slump. For 2004 we will be 
comparing to the earnings rebound which began in 2003.

If the future earnings follow the trend for today then we
do not have anything to worry about. PEP started the ball
rolling with a +13% rise in profits and raised its guidance
to the high end of previous levels. Sales were up +8.4%. 
YUM beat estimates and said full year gains would be higher
than current estimates. The first Dow component to announce
was Alcoa and they beat estimates by three cents and posted
a +45% gain over the same period last year. Sales were less
than expected but the aftermarket traders did not appear to
care. They said shipments were the highest since Q1-2001. 
If this trend continues we are going to have a blowout 
quarter. 

That concept of a blowout quarter is causing many people
grief. There are those that believe most earnings have been
on cost cutting and not revenue increases and they question
the potential for another quarter of big gains. Others just
question strong earnings in October period because the 
summer quarter period is typically weak. Others simply think
that even if the earnings are strong the market is fully
priced. Those who think the market "is all dressed up with
nowhere to go" could be very surprised. Most already are. 
The market simply is refusing to go down despite the almost
unanimous sentiment that it should at least profit take some
before moving higher. 

There is an underlying bid to the market and it is not 
getting any weaker as the calendar moves forward. This bid
is buying every dip and frustrating the bears to the point
where a credible short attempt is becoming less likely as
each day passes. Shorts are getting killed on a daily basis.
The markets are opening down with the appearance of a 
breakdown and then bouncing back at midday. Late in the
afternoon buyers appear and we move higher forcing the 
shorts from the morning to cover. It appears the big money
is waiting for each days action to run its course and with
no sustained drop by late afternoon they put that cash to 
work. According to the tape there are large baskets of 
stocks being bought late each afternoon. Not specifically
individual issues but huge blocks of SPDRs and Qs. 

This supports the theory that hedge funds, 6000 of them with
over $600 billion to invest, are playing the momentum game.
Mutual funds may be helping by purchasing these baskets in
lieu of individual stocks. They would do this to profit 
from the market move while waiting from any potential dip
to buy individual stocks. They can exit these baskets in
an instant where selling dozens of individual stocks during
a market event could subject them to more risk than they 
are willing to assume. As long as these players can keep
the momentum cycle going then they will keep pressing
their bets. Nobody wants to be left out of the market if
we are going to have an October rally instead of a dip and
this is the easiest way to do it. 

Complicating this rally is the light volume. NYSE volume on
Monday was less than one billion shares. On Tuesday there was
only 1.27 billion despite the close near the highs. As Art 
Cashin described it, "the rally has all the excitement of 
a dance at a nursing home." The NYSE advancing volume beat
declining 2:1 and it was the fifth consecutive day the down
volume was under 600 million shares. The Nasdaq was closer 
to 3:1 in favor of up volume. New 52-week highs have been 
over 700 for three consecutive days. 

What we have here is a picture of a broad based up move with
no sellers and limited conviction. Conviction would be a 2B
share day and 4:1 or 5:1 up to down volume. If the bulls 
could get a couple more positive earnings announcements we 
could really have a party but they are going to have to find
some new money. As one trader put it, "all the old money is
either in the market on the long side or waiting on the 
sidelines to short it. The only gains we are seeing are from
new fund flows." The context of the comment was "everybody 
that wants to be long is long." 

Regardless of the reason the Dow is up +379 points in five
days and is five points from the closing high. That alone
should cause traders to rethink adding new money to the 
market. It is not because the market cannot move higher but
because of the overbought conditions from five days of gains.
The contrary viewpoint is the -50 point drop at the open 
today and again at 1:PM. That was our intraday profit taking 
correction. The bulls had two chances to sell or better yet
were faced with two selling events and they decided to hold
instead of dump stocks. We are seeing a rolling consolidation
and the small gains yesterday and today were a tribute to 
the lack of selling interest. 

This week has been strangely quiet on the economic front 
and tomorrow is no exception. We have the weekly Mortgage
Applications and Wholesale Trade. Neither are normally
market movers. On the earnings front YHOO leads the list
with COST, BRO, DNA, SONS, SVU, SBL and WIN announcing. 
Obviously YHOO and COST are the majors with COST before
the open and YHOO after the close. The key to Q3 earnings
is not if they beat the street on earnings per share but 
how did they do on revenue. More earnings from cost cutting 
will not keep the rally going. We need to see gains in
revenue to make it stick. As far as a trading for this
week, until the recent pattern fails, just buy the morning 
dip and sell at the close. Eventually that pattern will 
fail but until then, party on!

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

New Dollar Lows
Jonathan Levinson

The US Dollar Index printed a new multiyear low, with weakness in 
treasuries and strength in gold.  Equity bulls ignored everything 
and went long, targeting the current 52 week highs. 

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




Forex traders were watching the yen today, trying to get a read 
on anticipated Bank of Japan intervention.  The dollar reached 
its lowest level against the yen since November 2000, breaking 
below 109.40 yen.  Despite the action in these leveraged markets 
and some brief, sharp swings, the US Dollar Index remained below 
92 resistance, showing no strength but no followthrough weakness 
either on this new low for the dollar bear.  Gold and the miners 
benefited, as did the euro, swiss franc and Canadian dollar.  The 
CRB added 1.48 to close at 244.09, led by strength in natural 
gas, lean hogs and live cattle futures.  It’s impossible to guess 
accurately at the intentions of central bankers, but if today’s 
action was any indication, it’s looking like “they” will attempt 
to manage the decline rather than engineer a recovery.  

Daily chart of December gold


 

Gold bulls were rewarded following last Friday’s demonstration of 
the marvels of intervention in free markets.  Today’s dollar 
weakness correlated with strength in metals and other 
commodities, with December gold printing an intraday high of 
377.90 and a higher low at 373.70.  Despite the nice move this 
week, the oscillators continue to point down, with the Macd on a 
bearish divergence printing a lower high despite a higher price 
high.  

The bullishness in gold continues to coincide with strength in 
equities.  While I’m considerably more bullish on the 
fundamentals of precious metals than of equities, the coincident 
rallies this year, combined with the technical observations on 
this daily chart above continue to trouble me.  We’ll watch the 
trendlines on the chart for clues as gold continues to recover 
from the selloff last Friday.  Position traders should continue 
to respect the daily chart oscillator downtrend.


Daily chart of the ten year note yield


 

Treasury bears were the big winners today as the TNX gained 
another 9.3 bps to close at 4.244%.  The oscillator upphase has 
kicked off, confirming the bull wedge breakout and potentially 
targeting the year highs above 4.6%.  As discussed with some of 
the readers in the Futures Monitor today, the combination of a 
diving US Dollar with weakness in treasuries is a very ominous 
combination, and casts the minor strength seen today in equities 
under a dubious shadow.


Daily NQ candles


 

Equities held out the bait of a reversal from a trendline 
rejection to trap a fresh legion of bears.  The NQ reversed back 
up in the afternoon to close an outside day on a bullish hammer 
at its high of the day.  The gains were not particularly 
impressive overall, with the NQ adding less than to points and 
the ES less than 5, but the transition from negative to positive 
in the afternoon was sudden and felt like a short squeeze.  When 
the dust settled, the NQ had still not regained the bear wedge 
resistance line, but those buy signals on the daily oscillators 
gained more reinforcement.  The sheer disbelief with which most 
traders viewed the move is the most bullish element of today’s 
buying.  

Volume was stronger than yesterday (not a difficult feat), with 
more than 1.8B Nasdaq shares changing hands.  With an intraday 
high of 1395.50, round number resistance of 1400, which coincides 
with the rally top and trendline resistance, is the next bullish 
hurdle.


30 minute 20 day chart of the NQ


 

The NQ slid sideways from what was a narrow expanding wedge or 
“bulloney bullhorn”.  It looks like a number of formations, none 
of which inspire a great deal of confidence.  On the one hand, we 
have a rising expanding wedge (bearish).  There’s also a 
potential cup and handle (bullish) as depicted on the 30 minute 
ES chart below.    It looks broadly like a reverse head and 
shoulders as well, but these occur at bottoms, and not near the 
tops of a trend.  On the basis of this ambivalence, I urge 
caution in trading chart patterns here.  Cycle-wise, the 30 
minute chart oscillators are lined up with the daily on buy 
signals, and so I expect further strength from here.  The test of 
1400 is critical, and if bulls can break it, the oscillators 
suggest the potential for a strong upside breakout.  Support is
at the lower trendline at 1376, followed by fib support at 1368.

Daily ES candles


 

We have the same picture on the ES, with a bullish hammer 
breaking above yesterday’s inside day.  As with the NQ, trendline 
resistance lines up with the rally high as the oscillators turn 
up on buy signals.  If note for the fact that the ES has just 
completed 5 consecutive days of gains right below critical 
resistance, it would look very encouraging for bulls.   Some sort 
of pullback is expected, but the oscillators point higher from 
here.  If tomorrow does not bring a significant decline, however, 
bears are going to need to get out of the way of what could 
potentially be a strong surge above the current highs. 

20 day 30 minute chart of the ES


 

The bullish cup and handle is shown on the 30 minute chart.  It’s 
really just a bull flag atop a strong upwave following a 
symmetrical decline.  The bottom of an ideal cup and handle 
pattern is rounder than we see here, and the bull flag is not as 
clean as one might wish, but it’s close enough.  The 1038-40 area 
was briefly tested and rejected today, and the 300 minute 
stochastic is looking tired.  The Macd, however, is not, having 
just turned on a fresh buy signal above the zero line.  The 
picture is mixed, with strong resistance overhead, but with the 
potential for a new leg up if bulls can consolidate their short 
term gains at these levels.  Once again, the next downphase on 
the 300 minute stoch needs to pack some punch with good price 
traction if the bears are to continue hoping for the top to hold.

Daily YM candles


 

Same picture on the YM.

20 day 30 minute chart of the YM


 

The strong buying in equities has done what it always does, which 
is to turn the moving averages and oscillators higher.  The trend 
is firmly up, and so trend following systems and traders are 
looking for higher prices.  Whether they go for it from here, or 
after a sideways-down consolidation move, the market feels like 
it wants higher prices.  That said, the US Dollar Index is at a 
new bear market low, and treasuries were selling off.  How long 
bulls can ignore what could be the start of a major exodus of 
funds is a good question, but a lower dollar and lower treasuries 
should not bode well for our equities.  We will continue to 
monitor the USD and bond market for signs of trouble in what is 
otherwise a near bullish paradise.


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

Total recall

The major indices struggled early but pressed higher by the close 
as the very broad NYSE Composite ($NYA.X) 5,876.56 +0.31% gained 
18.5 points, a new 52-week high, and highest close since June 5, 
2002.

As investors recall a similar closing high for the NYSE dating 
back nearly 16-months to the day, California voters began casting 
their votes today on whether to recall their state's current 
Governor, Democrat Gray Davis, who is accused of mismanaging the 
state economy.

As the NYSE Composite ($NYA.X) closes at a new 52-week high, two 
of its components Alcoa (NYSE:AA) $28.19 -0.28% and YUM! Brands 
(NYSE:YUM) $31.57 +1.08% traded higher in after-hours trade after 
beating Wall Street's quarterly earnings estimates.

The world's largest aluminum producer and Dow component Alcoa 
(AA) saw its stock rise 81 cents, or 2.8% to $29.00 over the New 
York ECN after it reported third quarter income from continuing 
operations of $283 million, or $0.33 per diluted share, compared 
to $229 million, or $0.27 per share, in the second quarter.  This 
quarter's results were a 40% improvement over income from 
continuing operations of $202 million or $0.24 per share in the 
third quarter last year.

NYSE Composite (NYA.X) - Daily Intervals

 

The very broad NYSE Composite closed at a new 52-week high today 
and I've quickly benchmarked today's new high/new low breadth 
against its September 18 date and most recent 52-week closing 
high.  Today's NH/NL breadth sees a greater number of new highs 
and fewer new lows, giving this leadership breadth indicator a 
bullish look, where an upside target of 6,000 should be 
achievable near-term.  With MACD just crossing above signal 
yesterday and the NYSE Composite looking to get back on upward 
trend, we should expect some bullish momentum to carry over with 
limited overhead supply.

The also very broad NASDAQ Composite (COMPX) 1,907.85 +0.75% came 
within a frog's hair of closing a new 52-week high set on 
September 18 of 1,909.75, with today's NH/NL breadth at 304:7.  
On September 18, the NASDAQ Comp showed NH/NL breadth at 371:5, 
so bulls have some work to do.

I should also note the small to mid-cap Russell-2000 Index 
(RUT.X) 520.77 +0.78% closed at a new 52-week high, just edging 
out its September 19 closing high of 520.61.

Pivot Analysis Matrix -


 

Tomorrow we see multiple correlations of resistance at the DAILY 
R2 and WEEKLY R1s.

One plan I would want to have in place for tomorrow is any type 
of market reaction to today's California Governor vote.  To be 
honest, I don't really have a bullish or bearish scenario in 
place for a market reaction, but would want to be ready just in 
case.

After today's trade, I'm pretty comfortable with past thought 
that bulls will protect profits with a stop just below SPX 1,025, 
and today's SPX test of MONTHLY R1 and session low of 1,026.19 
gives me some confidence to this being a level of support.

While I doubt the replacement of current Governor Davis would 
draw a huge bullish reaction from the market, those of us here in 
Colorado know that Californian's can get a little crazy at times 
and some polls show the enthusiastic Arnold Schwarzenegger as a 
front runner to potentially be elected.

If I were to develop a bearish scenario, it would be the MARKET 
thinks things could get worse with the recall actually going 
through, while the bullish scenario holds that while Mr. 
Schwarzenegger may lack a political background, his enthusiasm 
and leadership skills along with a team of well-respected 
advisors will provide the change needed to lay the groundwork for 
the state's recovery.

With the S&P Banks Index (BIX.X) 317.61 +0.73% so close to its 
MONTHLY R2 and WEEKLY R1 correlative resistance, I've marked the 
BIX's DAILY R1 as a level, if broken to the upside, could then 
give hint that the major indices in our matrix could then be 
breaking above their WEEKLY R1's to new 52-week highs and then 
have their MONTHLY R2s in play as a next level of resistance.

I've still got my eye on Washington Mutual (NYSE:WM) $39.95 
+0.25% as a "pulse" stock that in the banking group, that just 
hasn't been able to make the move above $40.00.  Today's high on 
WM was $34.99 and its daily interval chart shows MACD just moving 
back above the zero level.

Dow Industrials (INDU) Chart - Daily Interval


 

The Dow Industrials' (INDU) most heavily price weighted Procter & 
Gamble (NYSE:PG) $95.10 +1.15% closed at a new 52-week high in 
today's trade and we'd have to go back to February of 2000 to 
find PG at these price levels.  Today's Dow winner was McDonalds 
(NYSE:MCD) $24.72 +2.57%, which also closed at a new 52-week high 
after the fast food giant announced that total system wide sales 
for its McDonald's brands increased 11.1% in September and 10.8% 
for the recently completed third-quarter.

The INDU was "sloppy" at its MONTHLY R1 this morning, but found 
today's reversal coming just above its DAILY S2 of 9,532 to close 
just under its DAILY R2 of 9,656 for a round-trip trade within 
the DAILY Pivot.  The only decent correlative support levels I 
see in the matrix for tomorrow is at the DIA DAILY S1 and MONTHLY 
R1, which I've dashed green as tentative support as the $95.93 
level was pierced to the downside today, but becomes a leverage 
point for bulls on a break to new highs.

Today's trade saw no net change in the very narrow Dow 
Industrials Bullish % ($BPINDU).  Still "bull correction" status 
at 83.33%.

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


 

When I first profiled a bullish trade in the SPX on a move above 
1,010, or was looking for strength, I was not targeting new 
highs, and was really only looking for a rebound to 1,025.  On 
the above SPX chart, I'm trying to pull in the observation of the 
S&P Banks Index (BIX.X), which today challenges its intra-day 52-
week high set on July 14th.  

The point I would be trying to make is that the broader SPX 
itself is higher by roughly 24 points if benchmarked back to July 
14th, and would show the BIX.X still lagging the advance.  This 
is perhaps where an SPX bull needs "strength from the bottom" and 
the BIX.X to break to new highs, perhaps get a little short-
covering move higher in the regional banks, for the SPX itself to 
make its move to new highs.

With a feel for the BIX.X still technically weaker RELATIVE to 
the SPX, I' also using Washington Mutual (WM) as a stock within 
the banking group, that is WEAKER than the BIX.X itself.  In a 
way, I'm trying to measure and building strength from the bottom.  
This all goes back to a way I view how a market moves, as I think 
a market moves like and inchworm.  

For an explanation of this analogy, see "The market is my 
inchworm" in the Bailey's Basics section at this 
http://members.OptionInvestor.com/archive/intraday/2002/052302_3.asp

Today's trade saw a net gain of 4 stocks to point and figure buy 
signals as the bullish % edged up 0.8%.  Still "bull confirmed" 
at 78.40%.

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


 

If there's one sector that has the OEX looking weaker than the 
SPX, it would have to be the pharmaceuticals or the DRG.X 315.01 
-0.26%, which in mid-June were trading new 52-week highs at the 
350 level.  The group has been lagging the advance in the OEX as 
there has probably been greater focus on the economy, where drug 
stocks on a broader scale will not attract as much attention.  

For an OEX bull, this may place greater "need" for financials to 
continue to show strength, or need for the DRG.X, which just 
recently found support at a flat 200-day SMA of 309 to find 
strength from its trying to round out 50-day SMA of 312 and make 
a move higher.

Today's trade saw no net change in the narrower S&P 100 Bullish % 
($BPOEX) and status remains "bull correction" at 78%.

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


 

I always find penny trades suspicious and today's trade at $34.01 
has little technical significance, other than to think it comes a 
penny above psychological $34.00.  On a move higher tomorrow, I'd 
be equally suspicious on a trade close to the WEEKLY R1 of 
$34.99, and on such a trade, would immediately move a bullish 
stop up to $34.74 for those that may have played the QQQ long 
above $33.21 and the monthly pivot as the QQQ looked to be 
following the INDU/SPX/OEX higher in the matrix.

Today's trade saw a net gain of 1 stock to a point and figure buy 
signal in the NASDAQ-100 Bullish % ($BPNDX) as its bullish % 
edged up to 74%.  Still "bear confirmed" and would need a reading 
of 78% to reverse up to "bear correction" status.

Jeff Bailey


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

Bulls 5, Bears 0
- J. Brown

That's the current score for the month of October.  Bulls are 
winning it 5 to nothing against the bears.  Traditionally, the 
first week of October is very volatile and usually down but this 
time we have a complete reverse of the seasonal trend.  The DJIA 
isn't the only major average to make it five in a row either.  
Aside from several U.S. indices, we also see the Japanese NIKKEI 
index stretching its gains to five in a row.  

The Q3 earnings season is thus far off to a healthy start.  Dow 
component Alcoa (AA) announced after the bell tonight and beat 
estimates by three cents while reporting a 45% jump over last 
year.  PepsiCo (PEP) and Yum! Brands (YUM) also chimed in with 
positive earnings performances, which should keep bulls eager for 
more news and bears on the defensive.  There's been so much hype 
and expectation built up around the Q3 numbers that if 
corporations don't perform, the rally could quickly deflate.  
Keep your fingers crossed, but so far so good.

Market watchers will also point out that the sheer breadth of the 
markets is very positive.  The advance decline numbers have been 
positive for so long that the rally, much like the old market 
axiom, is rolling in like a tide that lifts all boats.  However, 
even tides recede and after a 379 point gain in the DJIA and a 
117 point rally in the NASDAQ they are definitely overbought and 
in need of a pause.  Just remember, markets and stocks tend to 
move in cycles both up and down.  A few days up are usually 
followed by a couple of days down.  We're overdue for some profit 
taking even if it just another chance to buy the dip or cover 
some shorts.

One technical indicator I'll point out is the 5-dma on the ARMS 
index.  This is a very short-term indicator and it's turn 
bearish.  It may be a good time to follow up on those stop 
losses.



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

Market Averages

DJIA ($INDU)

52-week High:  9686
52-week Low :  7197
Current     :  9654

Moving Averages:
(Simple)

 10-dma: 9453
 50-dma: 9390
200-dma: 8721



S&P 500 ($SPX)

52-week High: 1040
52-week Low :  768
Current     : 1039

Moving Averages:
(Simple)

 10-dma: 1015
 50-dma: 1005
200-dma:  934



Nasdaq-100 ($NDX)

52-week High: 1406
52-week Low :  795
Current     : 1392

Moving Averages:
(Simple)

 10-dma: 1345
 50-dma: 1318
200-dma: 1155



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

The VIX is still hovering new its lows as the broader indices slowly
drift higher.  The low volatility indicates very little fear by 
investors and is normally seen as a contrarian indicator.  Unfortunately
or fortunately, depending on your market bias, this indicator has
not been very effective at predicting market tops lately, but then
the market has been breaking some season trends as well.

CBOE Market Volatility Index (VIX) = 19.41 -0.10
Nasdaq Volatility Index (VXN)      = 29.30 -0.12

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.83        569,979       474,980
Equity Only    0.60        470,286       282,602
OEX            0.83         29,155        24,273
QQQ            2.13         16,558        35,364


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

Bullish Percent Data

           Current   Change   Status
NYSE          72.7    + 0     Bull Confirmed
NASDAQ-100    74.0    + 1     Bear Confirmed
Dow Indust.   83.3    + 0     Bull Correction
S&P 500       78.4    + 1     Bull Confirmed
S&P 100       78.0    + 0     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  0.78
10-Day Arms Index  1.21
21-Day Arms Index  1.20
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    1717      1886
Decliners    1091      1165

New Highs     262       344
New Lows        5         5

Up Volume   1014M     1269M
Down Vol.    522M      481M

Total Vol.  1557M     1817M
M = millions


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

Commitments Of Traders Report: 09/30/03

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

Wow!  It looks like the commercials traders went to sleep.  There 
was almost no change in either the number of longs or number of
short positions.  Everyone must have been waiting on the September
Jobs report.  Small Traders were upping their bets with small 
increases in both longs and shorts but still heavily long.


Commercials   Long      Short      Net     % Of OI
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%)
09/30/03      395,713   397,577   ( 1,864)   (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
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%
09/30/03      144,681    96,801    47,880    19.8%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02


E-MINI S&P 500

We did see some movement in the e-minis.  Commercials added about
50K new longs while only adding 14K new shorts.  Small Traders took
some money off the table with a redemption in their longs by more 
than 40K.  However, small traders are still heavily bullish.


Commercials   Long      Short      Net     % Of OI 
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%)
09/30/03      163,828   218,991   ( 55,163)  (14.4%)

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
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%
09/30/03      131,698    65,259    66,439    33.8%

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


NASDAQ-100

Much like the large S&P futures contracts, the commercial 
traders appear to be asleep with very little change this
last report.  Small traders were also comatose with just a
couple of thousand new long contracts.


Commercials   Long      Short      Net     % of OI 
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%)
09/30/03       33,571     42,993   ( 9,422) (12.3%)

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

Small Traders  Long     Short      Net     % of OI
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%
09/30/03       19,803     9,917     9,886    33.3%

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

DOW JONES INDUSTRIAL

There seems to be a theme here for commericals... no movement.
This time the small traders joined them in their sit back and
wait mode.


Commercials   Long      Short      Net     % of OI
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%
09/30/03       16,561     8,932    7,629      31.5%

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
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%)
09/30/03        7,578     8,125   (  547)   ( 3.5%)

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 10-07-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AMZN
Dropped Puts: None
Call Play Updates: BBY, CBE, CAT, EXC, RYL, UTX
New Calls Plays: BCS
Put Play Updates: ITT, MRK
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:
*****

Amazon.com - AMZN - close: 54.91 change: +0.76 stop: 52.50

It's time to take the money and run.  AMZN has met (and exceeded)
all our expectations and with YHOO set to report earnings
tomorrow, discipline should now take precedence over greed.  AMZN
has had a nice run since we added it just under 3 weeks ago,
breaking out of its rising channel and continuing to soar.  Our
profit target was $55, and after hitting that this morning,
shares of the Internet retailer ran as high as $56.25 before
pulling back into the close.  Use any additional strength
tomorrow morning to exit at a more favorable level, but prudence
demands that we exit the play with these fat gains ahead of the
unknown of YHOO's earnings.

Picked on September 18th at  $47.89
Change since picked:          +7.02
Earnings Date              10/21/03 (unconfirmed)
Average Daily Volume =     9.28 mln
Chart =



PUTS:
*****

None


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

Best Buy Company - BBY - close: 51.38 change: -0.21 stop: 46.00

While it's been nice to see shares of BBY make a bit of upside
progress this week, the underperformance relative to the overall
Retail index (RLX.X) leaves something to be desired.  The RLX has
not pushed strongly into the rising channel from which it broke
down in late September, and it looks like the bulls are once
again on the offensive.  BBY on the other hand has barely made
any upward progress this week and actually slid back fractionally
on Tuesday vs. the RLX adding 0.90%.  When we initiated coverage
of BBY last weekend, we did so with the expectation that the
stock could come back down to fill Friday's gap and with price
strength fading a bit over the past couple days, that's looking
like a real possibility.  Look for a dip to fill that gap near
$49 as a high-odds entry point.  If BBY really has bullish
potential, then there should be eager buyers lurking near that
level, as it is also the site of the 50-dma ($49.07)  On the
other hand, if Friday's gap is a breakaway gap, then the best
entry setup will likely be found on a pullback and rebound from
the top of the gap near $50.50.  The key is to not try to catch a
falling knife -- wait for the rebound before entry.  For now,
we'll maintain stops at $46, just below last week's intraday
lows.

Picked on October 5th at     $51.00
Change since picked:          +0.38
Earnings Date              12/17/03 (unconfirmed)
Average Daily Volume =     3.85 mln
Chart =


---

Cooper Industries - CBE - cls: 51.00 chg: +0.01 stop: 48.00

Wow!  We don't know whether to be excited or concerned.  Shares
of CBE have gone absolutely sideways.  It closed at $51.00, which
was were we picked it on Sunday.  At least there hasn't been any
profit taking from its big bounce off the simple 50-dma.  Should
we see a dip, a bounce from the $50 mark still looks like a good
entry point but we're not against new positions at this level.
There have been no new headlines for CBE.  Momentum traders may
want to wait for a move above the $52 mark.

Picked on October 5 at $51.00
Change since picked:   + 0.00
Earnings Date        10/23/03 (confirmed)
Average Daily Volume:    539 thousand
Chart =


---

Caterpillar Inc - CAT - close: 74.42 chg: +0.41 stop: 69.50*new*

The Dow's 5th straight positive session didn't hurt shares of
CAT, which posted another green day itself.  The stock is
battling to breakout above the $75 mark and if it keeps posting
these higher lows it should do it.  Its MACD is very positive now
and beginning to pick up steam.  While we are encouraged by CAT's
strength this may not be the very best entry point.  Traders can
wait for a potential dip (below the two we just got near the $73
level) or a breakout above $75.  CAT's simple 50-dma has risen
above the $70 mark so we are going to raise our stop $2 to
$69.50.  Keep in mind that there is only six trading days left
before CAT announces its Q3 earnings and we will likely close the
play ahead of the announcement.  This will probably disqualify
some traders who aren't willing to jump in and jump out.

Picked on October 2 at $72.70
Change since picked:   + 1.72
Earnings Date        10/16/03 (confirmed)
Average Daily Volume:    2.9 million
Chart =


---

Exelon Corp. - EXC - close: 64.25 change: +0.21 stop: 62.40*new*

Utility stocks are not known for momentum-type moves, so when EXC
pushed through the top of its rising channel and began to pull
back from the upper Bollinger band, we had a pretty good idea that
the stock would need to retrace a bit to set up the next bullish
leg of this solid rally.  Sure enough, the stock pulled back a bit
and found support this morning at $63.50, which was right on the
10-dma ($63.48), before rebounding into the close.  As we've been
pointing out, rebounds from the vicinity of the center of the
rising channel ($63.35) look good for new entries, with stops
trailed just below the 20-dma ($62.48).  The Utility Sector index
(UTY.X) continues to work higher in its own ascending channel, but
note that EXC is showing marked relative strength.  As long as the
UTY index and EXC remain in their rising channels, buying the dips
is the way to go.  Raise stops to $62.40

Picked on September 28th at  $62.64
Change since picked:          +1.61
Earnings Date              10/28/03 (unconfirmed)
Average Daily Volume =     1.21 mln


---

The Ryland Group - RYL - close: 80.40 change: -0.60 stop: 76.00

Last week we were wondering if RYL was going to be able to really
give us that solid breakout over the $79 resistance, the site of
the June/July intraday highs.  Monday's trading gave us that
answer, with the Home Builder breaking out on decent volume and
ending at a new all-time high of $81.  With price pressing up
against the upper Bollinger band at that point, looking for more
upside today was a low-odds bet.  But it was encouraging to see
how mild the profit taking was, with RYL holding over the $80
level at the close and the $DJUSHB index holding near its $515
close from yesterday.  With the stock now finding support at the
top of its rising channel (now $76.50) last week, it makes sense
to keep our stop at $76, just below the top of the channel, as
well as last Friday's intraday low.  A dip and rebound from the
$77-78 area looks good for new entries, so long as the $DJUSHB
continues to hold above $500.  Traders that are sitting on
significant gains would not be foolish to harvest some gains here
or even on further strength near $82-83.

Picked on September 4th at  $72.18
Change since picked:         +7.29
Earnings Date             10/21/03 (unconfirmed)
Average Daily Volume =       846 K
Chart =


---

United Technologies - UTX - cls: 81.77 chg: +0.38 stop: 77.50

Shares of UTX, a Dow component, have not quite been enjoying the
same success the index has.  The stock has spent the last two
sessions consolidating some of its recent gains.  We're
encouraged that it seems to have found new support near the $81
mark and traders can use future bounces from $81 as an entry
point.  There has not been any stock-moving news to report but
the general fervor regarding Q3 earnings should keep things
positive.  Traders need to keep in mind that there are only six
trading days left before UTX's Q3 earnings announcement and we
will probably close the play before they report.

Picked on October 2 at $80.45
Change since picked:   + 1.32
Earnings Date        10/16/03 (confirmed)
Average Daily Volume:    1.9 million
Chart =



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

Bear Stearns Cos - BSC - close: 77.01 chg: +0.02 stop: 73.50

Company Description:
Founded in 1923, Bear, Stearns & Co. Inc. is a leading worldwide
investment banking and securities trading and brokerage firm, and
the major subsidiary of The Bear Stearns Companies Inc. With
approximately $34.4 billion in total capital, Bear Stearns serves
governments, corporations, institutions and individuals
worldwide. The company's business includes corporate finance and
mergers and acquisitions, institutional equities and fixed income
sales, trading and research, private client services,
derivatives, foreign exchange and futures sales and trading,
asset management and custody services. Through Bear, Stearns
Securities Corp., it offers prime broker and broker dealer
services, including securities lending. Headquartered in New York
City, the company has approximately 10,500 employees worldwide.
(source: company press release)

Why We Like It:
It was tough choosing a new bullish play today.  We found plenty
of viable candidates but many had earnings coming up way to fast.
Regular readers know we don't like holding over an earnings
report when there are too many unknown variables of which any one
could capsize an option play.  Thus, we decided to follow
strength.  The XBD broker dealer index closed at a new yearly
high today and looks ready to continue the trend.  BSC may not be
the strongest broker in the sector but we feel it has plenty of
upside, especially if the brokers can keep their momentum.

That's not to say BSC is not without its own strengths.  The
company reported earnings on September 18th and completely blew
away estimates of $1.65 with results of $2.30 per share.
Revenues had jumped almost 29% to $1.49 billion for the quarter.
The very next day Smith Barney reiterated their "sell" rating on
the stock.  They were concerned that earnings momentum would not
be able to keep up but they did raise their price target to $64
(while shares were near $76).  Shares of BSC did see some profit
taking and slowly slipped back toward the $74 level over the next
several days.  Fortunately, investors don't appear to agree with
Smith Barney and bulls stepped in to buy the dip and BSC looks
ready to make some new relative highs.

The $77 level appears to be new short-term resistance for the
stock so we're going to use a TRIGGER at $77.50 to open the play
for us.  More aggressive players could use a bounce from the $76
level to gauge an entry.  Once the play is opened we'll start
with a stop loss at $73.50, near the late September lows.  One of
the major risks here is that BSC is butting up against its
bearish trendline of resistance on its point-and-figure chart.
If you're a P&F chart fan, this is a major no-no so you might
want to pass.

Suggested Options:
We would not suggest the October options because there is not
much time left.  November and January's appear to be the best
bet.  Our preference would be the 75's.

BUY CALL NOV 75 BSC-KO OI= 380 at $3.90 SL=2.00
BUY CALL NOV 80 BSC-KP OI= 887 at $1.40 SL=0.75
BUY CALL JAN 75 BSC-AO OI=5182 at $5.30 SL=3.00
BUY CALL JAN 80 BSC-AP OI=3201 at $2.70 SL=1.35

Annotated Chart:




Picked on October 7 at $xx.xx
Change since picked:   + 0.00
Earnings Date        09/18/03 (confirmed)
Average Daily Volume:    1.2 million
Chart =



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

I T T Industries - ITT - cls: 61.00 chg: -0.77 stop: 62.51

Whew!  Another close call.  Shares of ITT traded up to $62.37 on
Monday, coming within 14 cents of our stop loss at 62.51.  Over
the weekend we had grown exceptionally cautious about ITT and
needed to see a failure at resistance.  We suggested that more
aggressive traders could use the failure under our stop as an
entry but more conservative traders would probably want to wait
for a move back under its simple 200-dma.  Today's 1.24% drop
helps but ITT has not yet broken its 200-dma.  We're still
cautious but are encouraged by the rollover, especially with the
markets still drifting higher.  Keep in mind that ITT is expected
to report earnings later next week and we'll most likely close
this play before they announce.

Picked on September 28 at $59.64
Change since picked:       +1.36
Earnings Date           10/16/03 (confirmed)
Average Daily Volume:        546 thousand
Chart =


---

Merck & Co - MRK - close: 50.10 chg: -0.13 stop: 52.01

Big cap drugs stocks got some bad press today as one of the few
sectors that was not participating in the rally.  While this was
true, the declines were rather muted.  Our bearish play in MRK
was triggered on Monday, right near the closing bell, when the
stock traded below our trigger of $49.90.  Shares traded below
this trigger again today but rebounded back above the $50 mark.
We're not excited to see support holding at the $50 level but
with the broader indices still drifting higher it's hard for the
bears to get any momentum going.  Traders can take their time
gauging new entries in MRK and right now we'd prefer a new
relative low.

Picked on October 6 at $49.90
Change since picked:   + 0.20
Earnings Date        10/22/03 (confirmed)
Average Daily Volume:    6.2 million
Chart =



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

None


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The Option Investor Newsletter                  Tuesday 10-07-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - BSC
Futures Corner: Swing Trade Indicator Setup


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

Bear Stearns Cos - BSC - close: 77.01 chg: +0.02 stop: 73.50

Company Description:
Founded in 1923, Bear, Stearns & Co. Inc. is a leading worldwide
investment banking and securities trading and brokerage firm, and
the major subsidiary of The Bear Stearns Companies Inc. With
approximately $34.4 billion in total capital, Bear Stearns serves
governments, corporations, institutions and individuals
worldwide. The company's business includes corporate finance and
mergers and acquisitions, institutional equities and fixed income
sales, trading and research, private client services,
derivatives, foreign exchange and futures sales and trading,
asset management and custody services. Through Bear, Stearns
Securities Corp., it offers prime broker and broker dealer
services, including securities lending. Headquartered in New York
City, the company has approximately 10,500 employees worldwide.
(source: company press release)

Why We Like It:
It was tough choosing a new bullish play today.  We found plenty
of viable candidates but many had earnings coming up way to fast.
Regular readers know we don't like holding over an earnings
report when there are too many unknown variables of which any one
could capsize an option play.  Thus, we decided to follow
strength.  The XBD broker dealer index closed at a new yearly
high today and looks ready to continue the trend.  BSC may not be
the strongest broker in the sector but we feel it has plenty of
upside, especially if the brokers can keep their momentum.

That's not to say BSC is not without its own strengths.  The
company reported earnings on September 18th and completely blew
away estimates of $1.65 with results of $2.30 per share.
Revenues had jumped almost 29% to $1.49 billion for the quarter.
The very next day Smith Barney reiterated their "sell" rating on
the stock.  They were concerned that earnings momentum would not
be able to keep up but they did raise their price target to $64
(while shares were near $76).  Shares of BSC did see some profit
taking and slowly slipped back toward the $74 level over the next
several days.  Fortunately, investors don't appear to agree with
Smith Barney and bulls stepped in to buy the dip and BSC looks
ready to make some new relative highs.

The $77 level appears to be new short-term resistance for the
stock so we're going to use a TRIGGER at $77.50 to open the play
for us.  More aggressive players could use a bounce from the $76
level to gauge an entry.  Once the play is opened we'll start
with a stop loss at $73.50, near the late September lows.  One of
the major risks here is that BSC is butting up against its
bearish trendline of resistance on its point-and-figure chart.
If you're a P&F chart fan, this is a major no-no so you might
want to pass.

Suggested Options:
We would not suggest the October options because there is not
much time left.  November and January's appear to be the best
bet.  Our preference would be the 75's.

BUY CALL NOV 75 BSC-KO OI= 380 at $3.90 SL=2.00
BUY CALL NOV 80 BSC-KP OI= 887 at $1.40 SL=0.75
BUY CALL JAN 75 BSC-AO OI=5182 at $5.30 SL=3.00
BUY CALL JAN 80 BSC-AP OI=3201 at $2.70 SL=1.35

Annotated Chart:




Picked on October 7 at $xx.xx
Change since picked:   + 0.00
Earnings Date        09/18/03 (confirmed)
Average Daily Volume:    1.2 million
Chart =



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Swing Trade Indicator Setup
By Jim Brown


This is in no way a claim that this is a trading system and
should not in any way be considered a perfected system. I
have spent many hours over the last couple weeks trying to
decide what works and what doesn't. Some indicators work
in most conditions but none work in all conditions. This
is just a collection of indicators that I have been testing
to keep me on the right side of the market and keep me in
a trade once I am on the right side.

One of the hardest things for me is to avoid letting my
market bias interfere with my trading. You need a market
bias when trading options in general but when trading futures
it can be dangerous. I know dozens of traders on the edge of
broke because another service was telling them to short the
market every day for the last week. While I agreed with the
bias I could not just tell everyone to double up or triple
up in the face of a massive rally. We cannot fight the trend.
This is the hardest thing I have to overcome.

The second thing I fight is the microscopic view. I seem to
adopt tunnel vision once the opening bell sounds. The farther
into the day the more focused I am on each tick. This prevents
seeing the overall picture. I can see it fine when doing the
recaps and wraps at the end of the day and when studying the
market at night. Once that bell rings the focus becomes
microscopic.

I am going to discuss two things in this article. The first
will be the indicator setup for the current system I am
testing. The second will be a way to keep the overall market
direction in focus. Nothing moves in a single direction
forever and everything cycles between overbought and
oversold but in different degrees. More later.


The first is the indicator setup for the swing system I am
testing. I am using a 500 tick chart in Tradestation. Besides
the ticks and the Parabolic SARS all the other indicators
are available in Qcharts.

The problem with indicators is that the majority are trailing
indicators. That means the market will have already turned
and moved several points before the indicator signals a
trade. We can address that in some cases by shortening the
cycle or the averages used inside the indicator. If you
shorten them too much you are then faced with too many
signals that chop you to ribbons. The answer is to use
multiple indicators and tune each to come as close as
possible to each other. Since each indicator works on
different principles some will trigger early and some later.
The early ones give you warning and the later ones confirm
it was a real signal. There is no way to make it flawless
but I am trying to make it as idiot proof as possible. I am
also trying to keep the indicators very simple with yes/no
type signals. I want to eliminate as much judgment as
possible.

The indicators I am using on a 500 tick chart are:

CCI (21,1,100,-100)  (Qcharts ok)

This is a change from the 30 or 28 I have been using. I have
found that the 21 is just slow enough to keep me out of
trouble without being too slow to give up too many points
on market turns.

Parabolic Sars  (0.02, 0.2) (Not on Qcharts)

This is actually a stop loss indicator that I am using to
give the very visual yes/no signal at turning points. This
one is not mandatory if you do not have it available. It is
the most unreliable of the group but is also the best early
warning indicator.

MACD (15,26,11)  (Qcharts OK)

Also a departure from previous settings. This speed has shown
to be very accurate for the ES on a 500 tick chart.

Momentum (21, OHLC)on Qcharts,
Momentum (21, ((close+open+high+low)/4) on Tradestation

I have found this to be less volatile than the CCI and more
predictive. It seems to give a deeper level of conviction
and is less prone to the single candle CCI spikes.


Exponential Moving Average (Qcharts OK)
(9, ((Close+open+high+low)/4), Offset = +0)

LONG when this average is on top, SHORT when it is below
the 7ma. This is yellow on my chart.

Exponential Moving Average (Qcharts OK)
(7, ((Close+open+high+low)/4), Offset = -5)

This is the trigger line, red on my charts. When the 9ma
crosses above it go long, when the 9ma crosses below this
average go short, assuming all the other indicators agree.
The -5 offset pushes this average ahead of the 9ma and
gives you a spread between them. I am still experimenting
with the different average lengths and would be interested
if you find a combination that works better.

(I put these averages on a 2 min Qcharts chart after the
close and they actually appeared to have fewer false signals
than the Tradestation chart I am using during the day.
(you have to use a bar chart to see them clearly.)


500 Tick Chart

I am using a 500 tick chart on Tradestation. Unfortunately
Qcharts does not offer variable ticks. This causes a
problem because volume of trades differs on a day to day
basis. Some days a 2 min chart would work, others it
would take a 5 min chart. The trick is knowing which
day is which.


Concept

The concept is simple. When ALL the indicators line up in
one direction trade in that direction.

Yes, you will get false signals on sideways days.
Yes, you will get false signals on program trades.
Yes, you will get false results when you cheat.
Yes, you will sometimes miss 2-3 points of a sharp reversal
especially if there was a sharp move just in front of it.

However, as long as you follow the indicators you should
always be on the right side of the trade within 2-3 candles.
You can take quite a few quick reversals in order to catch
the longer moves.

In the interest of time I am gong to cut up the chart from
today and list the pieces below. Unfortunately I do not have
time to convert them to white. Just don't try to print them
or your ink cartridge will explode.


I am including the first signal that occurred in the early
morning so you can see the entire setup. We did not show
that one on the monitor. (times are mountain)

SARS = Blue line
9ma = yellow
7ma = red

Note that the SARS always triggers early and is a CLEAR signal
that something is about to happen. This is your early warning
signal.

The 7/9 averages crossed on the first down candle but because
the dip was so sharp it would have been about 1031 before you
could have entered. The CCI triggered on the next candle but
the MACD and Momentum were already showing short. This was a
no brainer entry. Wish I had been awake.





Once the cash market opened, 7:30 on this chart (MT), we went
sideways for 15 min. I was eager to jump into the system and
went long on the bounce about 7:50 when all the indicators but
the Momentum had signaled a long. At the time I discounted the
momentum but my microscopic focus had begun. (more later) In
hindsight it would have correctly kept me short (had we been
in the early morning trade) until the real rebound at 8:20 on
the chart.

I have notated with arrows the stutter step long, short, long
and you can see the reasoning.

The Long trade at 8:20 pretty well lined up with all the
indicators turning positive at the same time. It was a good
signal and we could have gotten in about +2 points off the
bottom. That is about as good as it gets.

The first error I made was the 8:55 (10:55) short. I had
confirmation from the Sars, Averages and the CCI broke almost
to the -100 line but the MACD was just barely touching and had
not broken and the Momentum was almost touching. I was seeing
failure and a -3 point drop from the recent high and hurried the
entry. After this entry I realized the Momentum was set on 14
instead of 21 from some back testing. This is why the false
signals on the earlier trade. You can plainly see that there
would have been no signal at the proper setting.






The afternoon short at 10:00 (12:00 ET) was close to a perfect
entry. The MACD crossed first, then the SARS, then the averages
then the CCI. The Momentum was the lagging indicator. The SARS
did give us a false switch on that single tick back to the highs
but only the CCI confirmed so it was a non signal.


The change in direction at the bottom was nearly perfect. The
first Sars blip never saw a completion of the averages, MACD or
the other indicators. There was an immediate sell program that
dropped us to the lows at 1026.50 and the sharpness of the
program pushed the indicators farther to the downside and
it took them longer to rebound. This is why the entry was at
1030 instead of 1027. It took 3 points for the indicators to
reverse.





The Sars spike at 1035 was not confirmed anywhere else. It looks
worse here than it did at the time as the averages, MACD and CCI
were touching the cross lines but recovered instantly with the
next candle. I jumped out at 1033.25 and immediately back in but
I should have never gotten out.

I exited on the MACD/Average/SARS cross at 1036.50 at 13:50
(3:50ET). I did not wait for confirmation because of the time
and workload.







Tuesday was far from a normal day other than nothing was normal.
We had a couple of good moves and with a little more tuning we
could have done much better.

If today was a sideways day we could have gotten killed with
false signals. The system needs movement to be successful. Once
you get this programmed into your charts go backward several
days to one of the flat days and you will see what I mean.
No system of indicators works in 4-5 point ranges.

For the final piece to the puzzle I am going to show you a
way to visualize ranges within ranges. This causes me trouble
sometimes and an OIN reader turned me on to this. You can setup
Keltner channels with different time frames to capture the longer
term ranges and the ranges within the ranges. I had used the
channels before but I always tried to normalize them to the
same time frame. This method clearly shows the outside ranges
and inside ranges. You can continue to add them in shorter
and longer term increments and dial down as close as you
want or as wide as you want.  Also, note the MACD at (15,26,11).
That could be a system in itself on the ES and the 500 tick
chart. It does not work on anything else. I forgot to
take the blue horizontal lines off. They were R1, Pivot and S1
for Tuesday. I will get more into the channels in a future
article as they are not standard channels. They are exponential
channels based on OHLC. Sure looks like a roadmap to the ES.





I am planning on trading the indicator system again on Wednesday
and I promise not to cheat.

Jim Brown


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