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Daily Newsletter, Thursday, 10/16/2003

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The Option Investor Newsletter               Thursday 10-16-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Under Whelming
Futures Markets: Dollar and equity strength
Index Trader Wrap: See Note
Market Sentiment: Tug of War


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-16-2003           High     Low     Volume Advance/Decline
DJIA     9791.72 - 11.30  9823.42  9730.38 1.71 bln   1848/1314
NASDAQ   1950.14 + 11.00  1951.76  1930.28 1.76 bln   1822/1355
S&P 100   523.51 +  1.37   525.06   520.44   Totals   3670/2669
S&P 500  1050.07 +  3.31  1052.94  1044.04
W5000   10210.84 + 36.00 10234.32 10152.12
RUS 2000  529.64 +  2.29   530.49   526.05
DJ TRANS 2872.58 +  8.90  2891.61  2865.78
VIX        17.19 -  0.50    18.05    16.86
VXO VIX-O  19.12 -  0.14    19.83    18.70
VXN        25.47 -  1.30    27.13    25.37
Total Volume 3,729M
Total UpVol  2,332M
Total DnVol  1,313M
52wk Highs  675
52wk Lows    16
TRIN       0.97
NAZTRIN    0.94
PUT/CALL   0.65
************************************************************

Under Whelming

That was the term used to describe earnings reports from several
Dow components that failed to live up to the great expectations.
IBM, CAT and MO failed to impress investors and between the three
they were responsible for over -50 Dow points. Take those three
stocks out of the mix and the Dow would have set another new
high. Interesting statistic but if small consolation to those
expecting a continued rally.

Dow Chart



Nasdaq Chart



S&P Chart




It was a day of mixed economics but those that were positive
were very positive. The Jobless Claims dropped to 384,000 and
an eight month low. Ring a bell? That is because last weeks
claims were also an eight month low at 382,000 but those numbers
were revised up +6,000 to 388K. That took away the eight month
title and passed it to this week with a higher number. Just
word games but the bottom line was two consecutive weeks under
400K and the four-week moving average fell to the lowest level
since February. Continuing claims rose to 3.67 million and a
level not seen since June-28th. Layoffs may be easing but jobs
are still hard to find. Last week the markets rallied strongly
on the drop to 382,000 claims but this week they barely noticed.
The Manpower CEO said that despite some recent signs of minor
improvement he was unable to call an end to the current labor
problems. His company is a leading indicator of job growth and
he said improvement was still weak.

The Consumer Price Index jumped +0.3% in September with energy
prices continuing to rise. The core CPI rose only +0.1% and
pushed the annual rate to a new 38 year low of +1.2%. Obviously
the pricing environment remains very weak and this prompted Fed
Governor Parry to warn that inflation could fall further and
that deflation was still the bigger risk. The markets ignored
his comments.

Business Inventories fell more than expected at -0.4% compared
to estimates of only a -0.1% drop. While this is a cause for
concern this was August data and the market does not normally
react to it. The same information is reported in several other
reports on a more timely basis. This was the fourth consecutive
monthly drop in inventories. Total business sales also fell in
August by -0.2%. The inventory-to-sales ratio is at an all time
low of 1.36. This would indicate a rapid buildup could occur if
demand were to increase. That increase has yet to happen.

Industrial Production rose +0.4% as expected but August was
revised from a minor gain to a minor loss at -0.1%. This
indicates only a very minor pickup in manufacturing. Automakers
were responsible for the majority of the gains with incentives
enticing even more consumers to upgrade. Capacity Utilization
rose only slightly to 74.8% from 74.5% in August. With 25%
excess capacity there is no need to buy more equipment or
upgrade plants. This excess capacity is contributing to the
decline in prices and drop in inflation.

The NAHB Housing Index rose to 72 from 68 in September and
jumped to the highest level since December 1999. The dip in
mortgage rates over the last month prompted a quick rebound
in housing activity. All components of the index were up. The
seasonal activity also helped with homes hitting the market
from the spring starts. While these numbers are up the number
of new mortgage applications is already slipping and could
be the beginning of a long term trend. Of course the housing
bears have been claiming this for many months and the sector
continues to grow.

The most bullish report was the Philly Fed Survey, which blew
away estimates of 16.0 with a headline number of 28.0. This
was far better than anyone had expected and was the fifth
consecutive month of expanding conditions. Shipments, New
Orders and Employment rose strongly. However, inventories
fell to -2.5 and the six month outlook fell to 55 from 66.
This mix of conditions indicate that there may have been a
burst of activity but the long term outlook has not really
improved. Because most manufacturers receive orders and bids
for orders many months in advance the business they received
last month was expected many months ago. They are now looking
at orders for 3-6 months from now and without some increase
in demand soon those orders may not come through. Several
analysts mentioned today that the 1Q-2004 could actually be
weak as the real 4Q business patterns are reviewed. Everyone
is expecting a strong 4Q but as of yet it is still just an
expectation. If it appears on schedule then we could be off
to the races but if it is weaker than expected then the 1Q
could see yet another round of cost cutting.

Last night we got earnings from IBM and as the headline to
this article said, the results were less than exciting. The
company met estimates and even said they could see hiring
10,000 new employees next year. Investors were not impressed.
The key comment came from the CEO who said that although he
was seeing signs of stabilization "it was too soon to call
it a recovery." When coupled with Intel's comments that they
were seeing strength in Europe/Asia but the U.S. orders were
still soft you can see why tech investors were becoming
worried. 4% of IBM earnings came from currency gains and
not sales. Dow component IBM lost -3.46 for the day.

Another Dow component Caterpillar lost -4.02 after raising
its outlook for 2003 to $3.00. Sounds good but analysts
were already expecting CAT to make $3.15 and the stock was
punished severely. CAT said retirement of $40 million in
bonds and higher costs offset gains in sales. They stressed
gains made in cost cutting but that does not normally please
investors.

KO missed estimates by two cents despite a +2% gain in profits
from currency gains. They were upbeat about sales and outlook
but the two cent miss knocked nearly -$1.00 off the stock at
the open. It recovered to close at $44.99 and +50 cents off
its lows. Another Dow component, MO, reported earnings of
+1.22 per share and beat the street by a penny but sales were
slipping. Revenue jumped +4.7% to $20.9billion but primarily
due to a favorable currency gains of +$940 million. Again,
not a normal gain and MO dropped at the open but regained
most of the losses by the close.

Dow component HON reported earnings that dropped -20% but
were inline with analysts estimates. They also guided inline
with analyst estimates for Q4. Yet another Dow component UTX
beat the street by three cents on the strength of its elevator
business overseas. UTX was one of the strongest gainers with
a +70 cent bounce to a new 52-week high.

After the close there was a flurry of tech earnings as over
200 companies reported today. The overall tech earnings were
positive tonight with BRCM, XLNX, AMD, AVID, DCLK, LEXR, PMCS,
PLCM, RMBS, WEBX, FCS and ATML all beating the street. Only
PXLW missed estimates. EBAY was the biggest company to report.
They hit their numbers and raised THEIR estimates for revenue
but their estimates for Q4 were for less than analysts had
expected. EBAY dropped nearly -$4 in after hours. EBAY has
a habit of disappointing analysts who constantly expect them
to earn more. The estimates are always more than EBAY's and
almost always sets up a failure situation.

Despite the few high profile misses today earnings are coming
in above expectations with 92% of the S&P companies either
meeting or beating estimates. This is a very strong ratio but
they are competing against a very weak 2002-Q3. Despite the
weak comparisons First Call said the overall results were
+6.4% above expectations. Top line growth is running at +8%
and bottom line growth at +18%. There is positive momentum
in almost all sectors.

IDC reported today that PC shipments had risen +15% in Q3
with the strongest gains in Europe. In the U.S. growth was
primarily in government and the consumer sector with slow
growth in the business sector. IDC had previously projected
+10.4% growth. The incentive was blowout specials and extreme
competition in consumer PCs. Dell grew sales +27.9% with HPQ
hot on their trail with a +28% gain. The combined sales of
the next three vendors did not come close to those numbers.
Dell is still in the top spot in the U.S. but HPQ is closing
the gap according to IDC with strong momentum going into the
4Q. Dell's total market share for the quarter was 17.4% on
6.67 million units compared to HPQ at 17.1% and 6.55 million
units.

Not everyone was positive with NOK saying sales would be flat
or only up slightly. They reported that prices were still
falling due to intense competition. Maytag lost ground after
saying that competition from cheaper products primarily in
the vacuum cleaner sector had impacted results. They are
closing plants and restructuring in an effort to lower costs
to compete more effectively in the market. They are shifting
their manufacturing to Mexico to benefit from the cheaper
labor. Sounds familiar. Analysts expected 57 cents and MYG
posted only 46 cents.

HDI continued to fall on reports of stagnant sales and fears
they would miss 4Q estimates. Sales slipped in the 3Q from
the prior year and analysts fear they are a leading indicator
for a slow down in the consumer sector. HDI is normally
exempt from economic conditions as they are normally back
ordered on their popular models. They announced plans to
only increased the 2004 production estimates by +8.9% and
contrary to historical double digit trends. If the sales
growth trend has changed it could project weakness in the
other high end toys and luxury cars.

While the earnings picture is really very positive the mixed
messages from a few high profile misses and opposing economic
signals worked to keep the Dow locked in its trading range
for one more day. The Dow has been trading between 9700-9800
for the last six days. It closed once again under 9800 and
could either be poised to rocket ahead or begin profit taking
once earnings are over. The Dow has been very strong and the
bulls are still supplying an underlying bid on every dip.

The Nasdaq managed to close at a new 52-week high but still
below the intraday high set yesterday. The flurry of great
tech earnings after the close are being overshadowed by the
guidance change by EBAY and the massive after hours drop.
The Nasdaq futures are down -4.00 but like IBM last night
the broader strength in chips could offset the EBAY loss by
morning.

Friday is option expiration and the volume today was very
light. The direction for the averages is still up for grabs
and after more than 200 companies reporting earnings today
the good news is likely to be priced in. With 92% of companies
beating estimates, as expected, there may not be enough
excitement left to push the indexes much higher. I speculated
this week that Thursday could be the market high and next
Tuesday the pivotal day once expiration settlement has
occurred. I still believe that Tuesday will be critical and
it remains to be seen if the indexes will trend down from
here on year end fund selling over the next two weeks. The
lack of any upward progress over the last week could be
telegraphing a cooling of the bullish sentiment. This cooling
is far from a sure thing. I receive emails daily suggesting
Dow 11,000 could be reached soon. With earnings estimates
still rising for the 4Q, now officially at +22%, unofficially
at +26%, there is plenty of reason to expect more gains
before the year is out. However, once earnings are "perceived"
to be over for this quarter the urge to take some cash off
the table could be strong.

Using the roller coaster analogy from Tuesday, after a long
climb we are beginning to level out. We still cannot see over
the top to glimpse what is ahead but the tension is building.
If the normal trend is buy the rumor, sell the news then what
rumors are investors going to buy next week? Friday is flat
economically with only Residential Construction and the final
revision of the October Consumer Sentiment. Neither should be
market moving. Next week is blank economically with only the
Semi Book-to-bill on Monday night of importance. This leaves
nothing to stimulate investors except for more earnings and
we already know how that book ends. Typically the farther we
get into earnings the weaker they become. The bigger blue
chips with the best earnings announce first with the crowd
of small to midcaps stretched over the next three weeks.
There are still some big names left for investors to follow
so we have not reached the credits on the earnings movie yet.
You do sit through the credits when you go to the movies,
right? We still have MSFT, AMZN and MMM leading a list of
over 700 companies that will announce next week. There will
be plenty of news but the question is will it be enough news
to power the markets higher? Keep those seatbelts fastened.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Dollar and equity strength
Jonathan Levinson

The US Dollar Index managed to not sink today, equities advanced,
and gold and treasuries extended their slides.

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 zigged, then zagged but ended up net slightly
higher.  It revisited this week's bounce high of 92.90 before
failing to a higher low at 92, trading just north of 92.60 as of
this writing.  Gold and silver both declined, and the CRB was
down 1.64 at 246 despite strength in coffee, wheat and platinum
futures.

Daily chart of December gold




December gold got sold despite impressive gains in the XAU and
HUI.  It printed an intraday low at 371.25, bouncing to a lower
high before rolling over on the late afternoon dollar strength,
trading near its low as of this writing at 371.70.  On the daily
chart, we see a bearish tilt returning to the oscillators, with
an uncertain fade on the bounce off the famous sub-364 low almost
2 weeks ago.  Despite this weakness, the HUI and XAU both held
strong gains through most of the day, staying above 205 and XAU
above 93.  This divergence is puzzling, and the only explanation
I can find, other than the metal being sold as a hedge against
longs in the equities, is the strength in the CDN dollar today.
The CDN dollar rallied following the Bank of Canada's decision
not to cut rates, and many of the component companies in the HUI
and XAU are Canadian.  In any event, the HUI approached its rally
high on a negative day for gold.

Daily chart of the ten year note yield




Treasuries opened in the green, driving the ten year note yield
(TNX) down to the rising daily trendline, only to reverse at
midday, closing higher by 5.8 basis points at 4.455%.  The move
extended the ongoing yield rally, with no sign of oscillator
weakness thus far.  While a pause or pullback in the yield was
anticipated, one might have expected it to last longer than a few
hours.  That said, the 10 day stochastic is approaching
overbought territory.  The bull wedge target remains 4.6% on a
maximum upside fulfillment.


Daily NQ candles




The NQ closed higher by 11.50 points at 1428 today, but it could
not undo the trendline break below the steep bear wedge on the
daily chart.  The end of day short covering rally managed to un-
print what was earlier a bearish kiss on the 10-day stochastic.
Bulls need to regain the failed trendline tomorrow to avoid what
could be a bear wedge breakout coinciding with the topping of its
recently daily stoch.  The downside bear wedge target is 1300.


30 minute 20 day chart of the NQ




A number of readers noted the bearish oscillator divergences
through this leg of the recent rally, and I've highlighted them
above. Today's action consolidated a failure below the rising
trendline under this leg on the 30 minute chart, with resistance
just above 1430 NQ.  Once again, an uptrend is an uptrend, but
steep ones are difficult to maintain.  The residual upside in the
300 minute stochastic lines up with the ongoing upward momentum
on the 10 day stoch above.  This leaves the way clear for a
possible revisit to the rally highs, potentially in a dramatic
surge.  But with these two cycles overlapping approaching the
upper end of their range, it's going to take a lot of firepower
for bulls to launch a new rally leg from here.


Daily ES candles




We have a similar, but slightly more bearish picture on the daily
ES, with the same bear wedge failure, as well as a failed attempt
to reverse it.  Note that the 10 day stoch on this chart is
already in a bearish kiss, despite a print as high as 1052.25
today.  On this timeframe, it appears that the bulls are rapidly
running out of racetrack.  Support at 1039 has been successfully
tested once, and will be the key level to take out to confirm the
bears' even short term aspirations.


20 day 30 minute chart of the ES




The ES is drifting below the rising trendline, currently at 1048,
with the oscillators displaying a steeper divergence and the 300
minute stochastic already rolling over.  Fibonacci support
coincides with today's low above 1041, but chart confluence
begins at last week's low of 1039.


150-tick ES




The intraday chart of the ES has a head and shoulders feel to it,
with potential neckline support between 1041 and 1044.  This is a
wide range, and my preference is for the 1041 level, but a
sloping neckline is also possible.


Daily YM candles




The YM, hobbled by weakness in CAT, IBM and GE, did not post a
green candle, and closed on a bearish kiss.  We may be looking at
our leader here.


20 day 30 minute chart of the YM




The weakness is again most pronounced on the YM, even on the 30
minute chart, where the broken rising trendline is already
history at 9800.

Today gave us a continuation of the trend in treasuries, a
countertrend move in the dollar, and uncertainty in equities and
gold.  With tomorrow the final day of opex week, I'm not reading
much into today's trading, as the derivatives tail wags the
underlying dog.   It remains a tricky, rangy equity market, but
there are signs that the next direction move may soon be upon us.
Bulls in particular need to keep their stops on.  See you at the
bell!


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_101603_1.asp


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

Tug of War
- Linda Piazza

Thursday, those who believe in an improving economy engaged in a
tug-of-war with those who believe differently.  With the sides
equally weighted, U.S. bourses soon settled into the pin-them-to-
a-number trading pattern that has become typical of Thursday's
trading during option expiration week.  Early earnings and
economic releases did little to arm either side with more
strength than the other.  September CPI met expectations of a 0.1
percent increase, and core CPI increased 0.3 percent, slightly
higher than the expected 0.2 percent increase.  Initial claims
fell 4,000 from the previous week's number, and capacity
utilization and industrial production met expectations.  The
Nikkei closed above 11,000 for the first time in a month, but the
European markets were headed down.  Markets weighed IBM's outlook
against Ford's.  After digesting the various earnings reports,
economic reports, and foreign market performances, market
participants wrestled the markets to equilibrium levels . . .
until the noon release of the October Philadelphia Fed number.

At a surprisingly high 28, that Philadelphia Fed number far
exceeded the previous month's 14.6 number and the expected 15.6-
to-16 figure.  Orders, hours worked, shipments, the number of
manufacturers reporting improved business conditions, and the
number of factories expecting to hire new workers in the next six
months all rose.  The release of that number armed the bulls and
weakened the knees of the bears, initiating a wave of short-
covering that drove the Dow from its 9758 level at noon to a high
of 9823 an hour later.  The S&P 500 spiked from 1047 to a high of
almost 1053.  Not one to be left out of a short-covering party,
the COMPX scrambled from 1940 to almost 1952.

Within two hours, however, the bears had managed to tug the
bullish side back, with all three indices testing their pre-
release levels again.  Then shorts capitulated and the bulls sent
the markets up again, although none of the markets reached their
early afternoon highs.  By the close, advancing issues had beat
declining issues by 19:13 on the NYSE and 18:13 on the Nasdaq.
Up volume beat down volume on both exchanges, and the new highs
had reached 564, measured against only 14 new lows.  Bullish
sentiment prevailed.

The battle may not be finished.  After-hours reports included
EBAY's warning that the company might miss Q4 earnings and SUNW's
wider Q1 loss balanced against AMD's narrowing of its Q3 loss to
9 cents.   Fortunately for those dizzied by the tug of war,
earnings and economic reports lighten on Friday.  Most earnings
will be reported before the bell.  Also released before the bell
will be September building permits and housing starts.  Building
permits are issued when excavation begins and normally lead the
housing starts figure.  Although these were not market-moving
numbers in the past, they have sometimes gained that status in
recent months as the housing sector has become so important in
our economy.  They have been coming under closer scrutiny as the
specter of rising interest rates looms over the sector.  The
prior numbers were 1.886 million building permits and 1.82
million housing starts, and the expectation is for a lower 1.835
million building permits and a higher 1.827 million housing
starts.  Housing starts had declined last month, but building
permits had picked up, indicating that residential construction
might remain strong several months out.

Just after the market opens, the Preliminary October Michigan
Sentiment number will be released.  The previous number was 87.7,
and expectations are for 88.2 for October.  At 2:00 ET, the
September Treasury Budget will be released, with expectations
varying widely.  However, with tomorrow being an option
expiration Friday, we expect to see an early effort to establish
an equilibrium level and hold the markets at that level
throughout the day.  Whether that effort will be any more
successful than Thursday's effort remains to be seen.



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

Market Averages

DJIA ($INDU)

52-week High:  9850
52-week Low :  7197
Current     :  9791

Moving Averages:
(Simple)

 10-dma: 9697
 50-dma: 9467
200-dma: 8767



S&P 500 ($SPX)

52-week High: 1053
52-week Low :  768
Current     : 1050

Moving Averages:
(Simple)

 10-dma: 1040
 50-dma: 1014
200-dma:  940



Nasdaq-100 ($NDX)

52-week High: 1439
52-week Low :  795
Current     : 1426

Moving Averages:
(Simple)

 10-dma: 1401
 50-dma: 1339
200-dma: 1169



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

Hmmm... we're seeing new all-time lows on the Nasdaq's VXN and new
lows for the adjusted VIX near 17.  The old VIX (now VXO) is still
flashing caution signs at 19.

CBOE Market Volatility Index (VIX) = 17.19 -0.50
CBOE Market Volatility Index (VXO) = 19.11 -0.15
Nasdaq Volatility Index (VXN)      = 25.47 -1.30

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.65      1,050,740       678,903
Equity Only    0.51        757,559       385,965
OEX            1.17         43,019        50,509
QQQ            7.71         29,874        51,017


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

Bullish Percent Data

           Current   Change   Status
NYSE          73.8    + 0     Bull Confirmed
NASDAQ-100    79.0    + 0     Bear Correction
Dow Indust.   83.3    + 0     Bull Correction
S&P 500       80.9    + 0     Bull Confirmed
S&P 100       78.7    + 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  0.98
10-Day Arms Index  0.94
21-Day Arms Index  1.13
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    1661      1771
Decliners    1145      1285

New Highs     299       313
New Lows       13         6

Up Volume   1007M     1086M
Down Vol.    609M      646M

Total Vol.  1660M     1760M
M = millions


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

Commitments Of Traders Report: 10/07/03

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

After two weeks of little movement we're beginning to see
commercial traders edge toward a more bearish position.  Looking
at the small traders we see a reduction in short positions and
they remain overall net bullish.


Commercials   Long      Short      Net     % Of OI
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%)
10/07/03      390,232   402,964   (12,732)   (1.6%)

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
09/09/03      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%
10/07/03      138,644    88,018    50,626    22.3%

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're definitely seeing a small trend in the commercials'
positions in the e-minis.  Long positions have jumped strongly,
outpacing new short positions, and the overall net short
attitude is dwindling.  Retail traders remain heavily net
long.


Commercials   Long      Short      Net     % Of OI
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%)
10/07/03      212,273   225,377   ( 13,104)  ( 3.0%)

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
09/09/03       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%
10/07/03      134,990    63,560    71,430    36.0%

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


NASDAQ-100

We're still not seeing much movement in commercials willing
to commit one way or the other in the NDX.  They're currently
net short but the margin is fading.  Small traders haven't
changed much either and remain net long.


Commercials   Long      Short      Net     % of OI
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%)
10/07/03       33,253     40,861   ( 7,608) (10.3%)

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
09/09/03       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%
10/07/03       18,182     9,688     8,494    30.5%

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

It's the same story here in the DJ futures.  There is little
change between the commercials or the small traders over all
positions.


Commercials   Long      Short      Net     % of OI
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%
10/07/03       16,277     9,528    6,749      26.2%

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
09/09/03        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%)
10/07/03        7,392     7,910   (  518)   ( 3.4%)

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 10-16-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: AZO, BBY, BSC, CBE, COO, EXC, FD
New Calls Plays: None
Put Play Updates: COCO, MRK
New Put Plays: MATK


****************
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:
*****

None


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

AutoZone, Inc. - AZO - close: 93.94 change: +0.37 stop: 91.95

Our bullish play on AZO remains in a holding pattern.  The stock
looked ready to soar past the $95.00 level as of Tuesday's close.
Yet with the markets trading mostly sideways AZO has done the
same.  Our trigger to go long is a move above $95.00.  Given the
less than exciting reception to IBM's earnings last night and
EBAY's earnings on Thursday afternoon the Friday session could be
a tough one for the bulls.  We're going to be patient and wait
for AZO to hit our trigger.

Picked on October xxth at    $xx.xx
Change since picked:          -0.00
Earnings Date              12/22/03 (unconfirmed)
Average Daily Volume =          989 K
Chart =


---

Best Buy Company - BBY - cls: 53.62 chng: +0.24 stop: 51.75

The last two sessions of mild profit taking has not left BBY
untouched.  The stock tagged a fresh high on Wednesday morning
before slipping backwards.  Right on target too as the stock
pulled back to the $53.00 level before bouncing.  We had
suggested on Tuesday that a pull back and bounce in the 53.00-
53.50 area could make a good entry point for new positions.  If
you missed it don't worry.  You may get another chance.  Friday
could be another day of weakness and patient bulls may get
another opportunity to buy BBY on the dip.  If the major indices
mount any sort of significant pull back then we wouldn't be
surprised to see BBY come close to the $52.00 level.

Picked on October 5th at     $51.00
Change since picked:          +3.62
Earnings Date              12/17/03 (unconfirmed)
Average Daily Volume =     3.87 mln
Chart =


---

Bear Stearns Cos - BSC - close: 77.26 chg: -1.05 stop: 75.25

Hmm... we have mixed emotions about what's going on in BSC.  The
stock slid back about a dollar after the potential scandal
involving five specialists firms began to solidify today.  One of
the five firms is Bear Wagner, partly owned by BSC.  The NYSE
says it will seek near $150 million in damages against the five
firms but it's unclear how much of that fine may be levied at
Bear Wagner.  Investors certainly don't seem too concerned that
it will have an impact on BSC's earnings but volume has been
pretty strong the last couple of sessions.  In just today's
session BSC pulled back to the 76.60 level twice and both times
was met with buyers.  Volume was picking up towards the close on
the afternoon bounce.  Concerned traders can probably cinch their
stop up towards the $76 level.  We're going to leave ours at
75.25 for now.  We probably wouldn't suggest any new positions
until more details are made available on the growing story.

Picked on October 9 at $77.50
Change since picked:   - 0.24
Earnings Date        09/18/03 (confirmed)
Average Daily Volume:    1.2 million
Chart =


---

Cooper Industries - CBE - cls: 52.39 chg: -0.24 stop: 49.25*new*

We're not complaining but we sure wish we knew what caused the
breakout on Wednesday.  Volume surged to 891K as CBE burst
through the $51 level to a new high.  More importantly the stock
was able to maintain most of its gains today.  Given the recent
consolidation in shares of CBE we now expect a continuation of
the previous bullish pattern.  CBE's technical indicator MACD is
bullish as is its momentum indicator while its RSI and
stochastics are nearing overbought.  We're going to raise our
stop loss to $49.25, just underneath its simple 50-dma.  Don't
forget that we only have one week before CBE announces earnings
and we'll probably close the play ahead of the announcement.

Picked on October 5 at $51.00
Change since picked:   + 1.39
Earnings Date        10/23/03 (confirmed)
Average Daily Volume:    539 thousand
Chart =


---

Cooper Cos - COO - close: 42.90 chg: +0.38 stop: 39.99*new*

Six days in a row!  Shares of COO are up six days in a row and
following our script perfectly.  Of course you know what that
means.  It is overdue for a pull back or at least some sideways
consolidation.  Should a dip occur we'd look for a new entry
point near the $42.00 level, which should act as new support.  In
response to the recent rise we're going to inch up our stop loss
to $39.99.  Diligent investors may have seen the press release
about these Optistock reports.  A new financial report is
highlighting the potential for double-digit growth for higher-
margin specialty contact lenses.  Gosh, who would benefit from
such an improvement?  Probably Coooper who just happens to be one
of the "sponsors" of said investment report.  Oh well, the cheer
leading seems to be working.

Picked on October 12 at $41.40
Change since picked:    + 1.50
Earnings Date         09/03/03 (confirmed)
Average Daily Volume:      391 thousand
Chart =


---

Exelon Corporation - EXC - close: 64.30 change: -0.06 stop: 63.25

If you were looking for another entry point on EXC we just got
it.  Shares pulled back to trade below the $64 level Thursday
morning but bounced back into the close.  We're still waiting on
that breakout above the $65 mark and with one week before
earnings on the 23rd we're running out of time.  The UTY utility,
while green, index didn't offer much help today and if the
markets see more profit taking into the weekend EXC could pull
back towards our stop.  We hesitate to recommend new entries
until EXC trades above the 65.00-65.15 region.  We will close the
play before their announcement next Thursday.

Picked on September 28th at  $62.64
Change since picked:          +1.66
Earnings Date              10/23/03 (confirmed)
Average Daily Volume =     1.22 mln
Chart =


---

Federated Dep Store - FD - cls: 46.98 chng: -0.31 stop: 44.25

Relative strength winners like FD continue to shine.  The stock
has been rising in a very narrow channel from its September 30th
low and currently FD is near the bottom of that channel.  We're
not worried about a breakdown and would actually use a dip to
evaluate new entries.  FD's MACD indicator may be strong but the
rest of its technicals are looking tired.  A pull back to the
simple 10-dma above $45.00 may be the spot to watch for a bounce.

Picked on October 9th at     $45.60
Change since picked:          +1.38
Earnings Date              11/12/03 (unconfirmed)
Average Daily Volume =     1.89 mln
Chart =



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

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

Corinthian Colleges - COCO - cls: 53.82 chg: +0.48 stop: 56.61*new*

Well so much for point-and-figure chart support.  Shares of COCO
plowed right through it on Wednesday and almost hit our initial
target near $50.00.  The profit taking in COCO was mirrored
throughout the educational/school sector with CECO, APOL, and
EDMC all feeling the pain.  We were a little disappointed by the
big afternoon rebound on Wednesday but was not surprised to see
COCO close on its simple 100-dma.  Thursday's session witnessed a
small continuation of the rebound before beginning to falter near
the $54 mark.  Traders can gauge new entries on any failed rally
below the $55 level.  We're going to lower our stop to $56.61,
the high three days ago.

Picked on October 14 at $55.24
Change since picked:    - 1.42
Earnings Date         10/29/03 (confirmed)
Average Daily Volume:      686 thousand
Chart =


---

Merck & Co - MRK - close: 49.09 chg: +0.20 stop: 51.50

Slowly but surely shares of MRK continue to melt lower.  This
week we've seen MRK fail twice at the $50 level, which is very
encouraging for the bears.  More conservative traders could
actually reduce their risk by lowering their stop to $50.50.
We're going to keep ours at 51.50 for the moment.  A new relative
low under $48.50 would offer new encouragement for bearish
traders here.  In the news today a press release stated that
Merck and a biotech company named C Sixty are partnering up to
develop C Sixty's fullerene antioxidants.  Details were few but
shares of MRK didn't react to it.

Picked on October 6 at $49.90
Change since picked:   - 0.81
Earnings Date        10/22/03 (confirmed)
Average Daily Volume:    6.2 million
Chart =



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

Martek Biosciences - MATK - cls: 49.48 chg: -1.02 stop: 52.51

Company Description:
Martek Biosciences Corporation develops, manufactures and sells
products from microalgae. The Company's products include: (1)
specialty, nutritional oils for infant formula that aid in the
development of the eyes and central nervous system in newborns;
(2) nutritional supplements and food ingredients that may play a
beneficial role in promoting mental and cardiovascular health
throughout life; and (3) new, powerful fluorescent markers for
diagnostics, rapid miniaturized screening, and gene and protein
detection. (source: company press release)

Why We Like It:
It's been quite a ride for MATK investors.  Near its highs last
month the stock had appreciated 350% from its August '02 lows.
It had almost tripled just from its March '03 lows near $21.00.
Since the bottom in March the stock has not closed below its
simple 50-dma.  That technical strength failed this week.  Shares
peaked above $58 in late September and we've seen a trend of
lower highs ever since.  That trend has blossomed into a
technical breakdown below its 50-dma and the $50 mark, a
psychological level of support and resistance.  Volume has been
rather strong on the recent declines through support indicating
some conviction by sellers.

We're going to target a simple 38.2% retracement of the March to
September run.  That should bring MATK back towards the $44
level.  A secondary target could be the $40 mark.  A quick look
at the point-and-figure chart also shows MATK on a fresh triple-
bottom sell signal.  However, P&F traders have been fooled before
when MATK turned a bear sell signal into a bear trap in mid
August.  We do have to state that MATK is not without its own
element of danger for bears.  The latest data (as of September)
showed short interested measured almost 19% of the float.
We will initiate the play with a stop loss at 52.51

Suggested Options:
Short-term traders can choose between the November and December
options for MATK while longer-term traders can look over the
March 04 options.  Our preference is the DEC 50's or 45's.

BUY PUT NOV 50 KQT-WJ OI= 88 at $3.20 SL=1.60
BUY PUT NOV 55 KQT-WK OI= 19 at $6.60 SL=4.50
BUY PUT DEC 45 KQT-XI OI=470 at $1.95 SL=1.00
BUY PUT DEC 50 KQT-XJ OI=152 at $4.10 SL=2.00
BUY PUT DEC 55 KQT-XK OI=117 at $7.30 SL=5.00

Annotated Chart:



Picked on October 16 at $49.48
Change since picked:    - 0.00
Earnings Date         09/09/03 (confirmed)
Average Daily Volume:      466 thousand
Chart =


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

Please read our disclaimer at:
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**************************************************************
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Contact Support
The Option Investor Newsletter                  Thursday 10-16-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - MATK
Futures Corner: Indicator Setup - Revisited


*********************
PLAY OF THE DAY - PUT
*********************

Martek Biosciences - MATK - cls: 49.48 chg: -1.02 stop: 52.51

Company Description:
Martek Biosciences Corporation develops, manufactures and sells
products from microalgae. The Company's products include: (1)
specialty, nutritional oils for infant formula that aid in the
development of the eyes and central nervous system in newborns;
(2) nutritional supplements and food ingredients that may play a
beneficial role in promoting mental and cardiovascular health
throughout life; and (3) new, powerful fluorescent markers for
diagnostics, rapid miniaturized screening, and gene and protein
detection. (source: company press release)

Why We Like It:
It's been quite a ride for MATK investors.  Near its highs last
month the stock had appreciated 350% from its August '02 lows.
It had almost tripled just from its March '03 lows near $21.00.
Since the bottom in March the stock has not closed below its
simple 50-dma.  That technical strength failed this week.  Shares
peaked above $58 in late September and we've seen a trend of
lower highs ever since.  That trend has blossomed into a
technical breakdown below its 50-dma and the $50 mark, a
psychological level of support and resistance.  Volume has been
rather strong on the recent declines through support indicating
some conviction by sellers.

We're going to target a simple 38.2% retracement of the March to
September run.  That should bring MATK back towards the $44
level.  A secondary target could be the $40 mark.  A quick look
at the point-and-figure chart also shows MATK on a fresh triple-
bottom sell signal.  However, P&F traders have been fooled before
when MATK turned a bear sell signal into a bear trap in mid
August.  We do have to state that MATK is not without its own
element of danger for bears.  The latest data (as of September)
showed short interested measured almost 19% of the float.
We will initiate the play with a stop loss at 52.51

Suggested Options:
Short-term traders can choose between the November and December
options for MATK while longer-term traders can look over the
March 04 options.  Our preference is the DEC 50's or 45's.

BUY PUT NOV 50 KQT-WJ OI= 88 at $3.20 SL=1.60
BUY PUT NOV 55 KQT-WK OI= 19 at $6.60 SL=4.50
BUY PUT DEC 45 KQT-XI OI=470 at $1.95 SL=1.00
BUY PUT DEC 50 KQT-XJ OI=152 at $4.10 SL=2.00
BUY PUT DEC 55 KQT-XK OI=117 at $7.30 SL=5.00

Annotated Chart:



Picked on October 16 at $49.48
Change since picked:    - 0.00
Earnings Date         09/09/03 (confirmed)
Average Daily Volume:      466 thousand
Chart =



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**************
FUTURES CORNER
**************

Indicator Setup - Revisited
By Jim Brown

Putting the Plan Into Motion

Obviously everything will always work out on paper and when
back testing any promising setup. Actually translating those
setups into profits is another story. After a week of watching
the current setup I continue to find myself wanting to fade
them and not take the signals when indicated.

This is because of our subconscious sentiment. I keep thinking
"strong resistance is only X points away" or "that support at
XXXX has got to hold." Unfortunately after plotting all the
support/resistance levels for the last two weeks and then
running the chart backwards the levels failed more than 65% of
the time. When the levels failed there was normally a strong
move. If I did not take the signal I would have missed a big
move many times.

Going against the normal thought processes is hard for me.
On Wednesday morning (10/15) I passed on a perfect gap and
crap setup because I was expecting a rebound and did not
expect the minor gap up on Intel earnings to fade more than
a couple points. The indicators showed a short at 1050.50,
when I was expecting 1050 to be support, and I did not take
it. The drop printed a low of 1044 and would have been a
nice trade.

After a week of extended testing and multiple changes in
the Futures Monitor I have changed the previous setup
slightly. The intent is not to produce a "system" but simply
a set of indicators that should keep us on the right side of
the market and keep us from trading our bias.

Some indicators work in most conditions but none work in
all conditions.

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. 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.

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.

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 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 us out of
trouble without being too slow to give up too many points
on market turns. The problem with this indicator on Qcharts
is a lack of a 500-tick chart. This throws the cycles off
from the tick chart and kills them if you include the "all
sessions" option.

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.
It is less accurate on a time chart and does not work as
well on any other tick interval.

Momentum (14, OHLC)on Qcharts,
Momentum (14, ((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. It also
tends to lag and I would use it only for confirmation of the
other indicators.

Exponential Moving Average (Qcharts OK)
TradeStation (9, ((Close+open+high+low)/4), Offset = -5)
Qcharts (9, OHLC), Offset = +5)

The 9ma is yellow on my chart.

Exponential Moving Average (Qcharts OK)
TradeStation (6, ((Close+open+high+low)/4), Offset = 0)
Qcharts (6, OHLC), Offset = 0)

The 6ma is red on my chart.

The 6ma is the trigger line, red on my charts. When the 6ma
crosses above the 9ma go long, when the 6ma crosses below
the 9ma average go short, assuming all the other indicators
agree. The -5 offset (+5 Qcharts) pushes the 9ma average
ahead of the 6ma 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. (Qcharts uses a +5 instead of a -5)

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.

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, other days 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 before you catch
a longer move if the market is flat.

Below is a sample chart showing the current indicator setup.
For ease of visibility I have coded the bars on the chart to
represent agreement by all the indicators and highlight the
trend. Notice that the moving average cross on the left of
the chart did not turn red because the CCI had not confirmed
the cross. When they all confirm the signal is very clear.






That was a sample of a good day. The chart below is a sample
of a bad day. When the markets are flat the indicators will
tend to center around the flat line and provide alternating
signals until the range breaks. This is very frustrating
because you never know when the next signal is going to be
the "one".





A case in point is the last LONG signal in the very choppy chart
above. Notice in the chart below how that signal ran for +16
points. If you had not taken it on faith after several failed
reversals then you would have missed the big gain.






To recap, there is no perfect system. There are only combinations
of indicators that will help to reduce the odds against you. You
need to find the combination of indicators that works for you
and that same set may not work for anybody else. I hate Bollinger
Bands but others love them. It is all in what you like and what
works for you.

Jim Brown


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