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  Eric Utley   3/4/02,  4:09:13 PM
Leading sectors for the day:

Internet (INX.X) +10.43%, Optical (FOP.X) +9.79%, Networking (NWX.X) +7.23%, Brokers (XBD.X) +6.93%, Airlines (XAL.X) +6.76%, and Chips (SOX.X) +5.93%. WHOA!

  Eric Utley   3/4/02,  3:53:16 PM
A few readers are pointing out the close in the Ten Year Yield (TNX.X) at its low for the day, below 5.000. Here's how I'm reading into the bond market:

If the TNX.X would've printed that 50.50 today, then I would've grown more aggressive in my bullish bets on this market. But it didn't do it today. I'll be watching for that move past 50.50 this week and will act accordingly if it comes.

Since the TNX clearly reversed today, closing at its low for the day, I'm taking defensive steps in my current bullish positions, tightenting stops and using this strength near the close to book gains on certain positions. I'm not bearish by any means, not even in tech, just taking defensive measures and using discipline to manage my resources.

  Mark Phillips   3/4/02,  3:31:11 PM
Adding to Austin's 3:02pm post as to why puts on the OEX didn't make any sense earlier today, let me throw in my 2-cents worth. Pull up an intraday chart on the ADVDECV indicators I've been talking about over the past week (ADVDECV.NY for the NYSE and ADVDECV.NQ for the NASDAQ). 5 or 10 minute time frame is fine.

Aside from a short lull near the lunch hour, there isn't even a slight hint that the bulls are losing their resolve, as advancing volume continues to outpace declining volume by a wider and wider margin as the day progresses. We can't use these indicators on their own, but you can see their utility in that they make a clear case that the bulls are in charge. Bears trying to make a buck on the pullbacks are likely to get skinned!

  Austin Passamonte   3/4/02,  3:21:51 PM
Numerous readers are inquiring what a real short-entry setup will look like. When we see Daily/60/30 minute chart signals all in bearish decline from 80% oversold extreme it will clarify that a downward move is underway. By then the "top" will have long since been left behind. Traders trying to time the top and capture the bulk of a possible down move may try shorting right near resistance at session highs where we are now. Keep in mind the afternoon move will either race to new session highs or pull back sharply from present levels in all likelihood.

Option players trying puts using March contracts should consider using 100% risk-loss capital instead of stops. I'm long a few DJX Apr 103 puts at 0.70 and if they expire worthless next Thursday, that entire purchase would be my stop. I opted for the DJX this time because Dow looks mostly extended and NDX still has room to run, so I'll play downside in toppiest sector of all.

  Eric Utley   3/4/02,  3:10:12 PM
Bailey highlighted SanDisk (NASDAQ:SNDK) last week coming out of its bullish triangle, which I had pointed out to him earlier in the week. WHOA!! The stock is better by more than 7 percent today and threatening to breakout above $18.50. A print at $18.50 would have me targeting the $20 to $20.50 level short-term. Current vertical count is $26.50 and growing. Upper $20s is more of an intermediate-term target in my mind. Link

  Austin Passamonte   3/4/02,  3:02:29 PM
Readers Write: "Austin - At about 1:00PM the 60/30/15/10/5/1 min stochastic all turned down on the OEX. Why wasn`t this a good time to buy puts. [TC]"

Excellent (and very popular) question! We are currently in a strong uptrend via the past two sessions. Trying to short every pause higher just leads to pain when we should be buying dips instead. Once we see all timeframe chart signals rolling down below 80% level out from overbought it will be time to test puts for nimble traders.

With the Dow hitting 10,550, SPX 1150 and OEX 585 we've seen important Fib retracement measures hit on the weekly charts today. With overbought extreme measures on all intraday and some daily charts, a pullback to pause & consolidate is most likely scenario (guess) from here but hasn't begun yet. Anticipation offers larger amounts of profit but more frequent losing trades. I prefer to react after confirmation and win more plays for smaller relative gains.

  Austin Passamonte   3/4/02,  2:54:14 PM
Last Friday when I drew up the Index Wrap weekly/daily charts for SOX and saw it had plenty of room to run I made a written note to buy SMH 47.5 calls this morning. Then the weekend came & went and I forgot all about my written plans. Opening price of 0.65 hit 1.25 so far and will probably run higher as the week goes on.

I need better organizational skills for myself!!!

  Austin Passamonte   3/4/02,  2:35:22 PM
Readers Write: "Austin, I'm going to set up an account to do nothing but trade index options with $50k. I think I should pick either the OEX or S&Ps and stick with it. I have always favored the OEX due to less punishing spreads but it seems you prefer the SPX. Do you feel the profit potential in the SPX options is superior to the OEX by enough to offset the bigger spreads in the SPX? It seems to me that the volatility spreads between the two indexes should be negligible.

I know this is a picky little question, but I have learned so much from you thus far that I suspect you may have some very real reason to prefer SPX over OEX. Perhaps you feel the liquidity of the SPX options is superior to the OEX options. So if you ever have time I would really appreciate your thoughts on this topic.

Thank you for all I have learned. All of your efforts are VERY much appreciated by many of us out here. Best Regards, [D]"

All of us at OI do the best we can to help when possible and appreciate the kind thoughts. As for the question, I usually prefer trading the SPX for a few personal reasons. Watching the single index allows me to flip back & forth between options and other vehicles while using the same basic index levels and numbers.

But, the OEX is a bit easier index to trade due to more methodical price movement and smaller bid/ask spread. If given just one option market to trade above all else it would probably be the OEX for me due to smoother, methodical action.

The SMH and QQQ are my favorite tech plays in that order, as the SMH usually offers bigger gains than the QQQ by comparison. The DJX is a great, low-cost option contract tracking Dow Industrials as well. But the all-around best blend in my opinion is OEX when talking about a single option contract with most good attributes combined.

I've made and lost money with them all, am willing to trade any index options noted above and all serve their niche purposes well!

  Eric Utley   3/4/02,  1:56:49 PM
One reader says the best state in the union is the one of confusion. Very funny.

Working on our liquidity-based rally thesis, we're seeing a small rally in Treasuries, which is pressuring yields lower. The Ten-year (TNX.X), for example, is just off of its day lows in yield. I think that is the reason for the pullback in the averages at this point in the day, which feels very routine and normal so far. I'm taking my cues from the action in the bond market as it relates to open trades. For example, I'm tightening stops on longs that have performed well in the last two days with the short-term rally in bonds. A further sell-off in bonds, on the other hand, would have me pressing bullish bets.

  Austin Passamonte   3/4/02,  1:54:49 PM
The S&P 500 reaching 1150 and the Dow at 10,550 are key points of resistance in each market. It would be natural to see some type of pullback from those levels after being reached. Market bias is clearly to the upside right now and bullish weekly chart signals suggest as much, but I would personally not be buying any long-term call plays myself.

A low VIX, toppy chart signals and unbroken downtrend clearly warn us that this looks like a bear-market rally event for now. The power and speed with which it covered ground are not the bases a mountain is usually built on, either.

Still prefer a short-term holding approach for options right now myself and nothing I've seen the past few days changes that timeframe for me!

  Austin Passamonte   3/4/02,  1:33:13 PM
Let me guess Eric... the "way-cool" reader you spoke of is from Montana, correct? What a lucky guess [huge grin] and I'd sure love to be trading from my 12,000 ranch spread up there than 'burbs in Denver, but all things in due time.

Meanwhile, an excellent rendition of fundamental analysis on the entire telecom / wireless sectors. My personal view on this one has not changed and industry insiders I know fuel the opinion: this entire spectrum will contract sharply in the next two - three years and every rally that reaches oversold extreme in longer term charts for most symbols will be high-odds put LEAPS entries until the field is far smaller than today.

  Eric Utley   3/4/02,  1:08:26 PM
General Motors (NYSE:GM) is really powering the Dow higher in here. GM looks to be under heavy accumulation from the longs and bit time covering from the shorts. That roughly 17 million shares short in the stock would take about five days to cover based on 30-day average volume. The stock is higher by more than 7 percent. The financial trio in the Dow, Citi, Amex, and Morgan, are helping, too.

  Eric Utley   3/4/02,  12:55:34 PM
A very cool reader from the best state in the union asks me about RF Micro Devices (NASDAQ:RFMD). I think RF Micro makes for an interesting study today and here's why:

RF Micro makes ICs that go into the phones manufactured by Nokia (NYSE:NOK) and Motorola (NYSE:MOT), among others. The two handset makers sell to consumers through various channels. The same consumers buy services through the providers, such as AT&T Wireless (NYSE:AWE), Verizon (NYSE:VZ), Nextel (NASDAQ:NXTL), and Sprint PCS (NYSE:PCS), among others. Here's where it gets interesting...

Sprint secured a $1 billion loan last week and instituted a receivables program to secure some short-term funding. The comany needs cash because end-market demand remains weak. AT&T Wireless lowered its revenue service growth last week due to increased competition. Read again: AT&T Wireless said competition was on the rise, which means prices are set to come down.

The end market in wireless services is one which is shrinking, plus from what AT&T Wireless said, margins will fall under additional pressure. This in a sector that is loaded with debt, and companies who are scrambling to secure funding. These fears have pressured the service providers, all the while the equipment makers such as RF Micro, who is at the bottom of the market, have traded higher. To take it to a micro level, most of the service providers are lower today, such as AWE, NXTL, and VZ.

One of two things will happen:

1) The service providers will rebound, following the equipment makers, discounting an improvement in business.

2)The equipment makers will reverse lower as soon as the bad news from, for example, RF Micro hits the fan, which it will if the service providers continue to deteriorate.

I'm suspect of any rally in the equipment makers until the service providers confirm.

  Austin Passamonte   3/4/02,  12:51:13 PM
As expected, the indexes are moving sideways trying to consolidate large gains from Thursday lows until now. The S&P 500 has run from 1101 just before Thursday's close to 1148+ right now, a range larger than many recent weeks have spanned.

All intraday and some charts are currently pinned in overbought extreme as we would expect right now. Half the trading world is expecting to short this rally down to new recent lows and cannot wait to get started. Trust me... they need to wait!

This does not appear to be a rally that will run higher for weeks on end but that does not mean it is over. Traders who've been selling all the way up are catching tossed knives and feel the pain. I personally will not go short until chart signals are in clear decline and will surely be watching over my shoulder for a quick bounce from there as current sentiment is nervous shorts to genuinely bullish. I'll be going long in oversold intraday charts IF weekly/daily charts remain bullish at that time as well.

  Eric Utley   3/4/02,  12:32:24 PM
Airlines trading above September 10 levels:

Delta (NYSE:DAL), Frontier (NASDAQ:FRNT), KLM Airlines (NYSE:KLM), Alaska (NYSE:ALK), and Southwest (NYSE:LUV).

These stocks are incredible in the way they've rebounded after the blow the businesses took following 09/11.

  Eric Utley   3/4/02,  12:29:26 PM
The transporation segment of the market is really gaining momentum in here, with the Airlines (XAL.X) better by more than 5 percent and DJ Transports ($TRAN) trading above 3000, up by 3.65 percent on the day.

  Eric Utley   3/4/02,  11:57:34 AM
We're seeing some significant upside work in the financials today. The banks are trading very well. The sector will be my focus in the upcoming intraday update.

  Eric Utley   3/4/02,  11:50:27 AM
We're seeing an interesting rotation out of consumer names, including retail, this morning. Some of the weakest stocks I can find today are General Mills (NYSE:GIS), Phillip Mo (NYSE:MO), Pepsi (NYSE:PEP), Anheuser (NYSE:BUD), Kimberly Clark (NYSE:KMB), and Procter (NYSE:PG).

Independent of the weakness I'm seeing pure retail (Lowe's (NYSE:LOW) and Home Depot (NYSE:HD)), the weakness in the defensive consumer names is positive as it relates to the market's seniment. The shift into more aggressive segments of the economy is based on the belief of an improvement in economic conditions and a reduction in the risk associated with equities. The shift out of defensive consumer names serves as further confirmation per my earlier comments concerning the bond market.

  Eric Utley   3/4/02,  11:44:05 AM
I'm seeing Treasuries come off of their session lows, which is corresponding with a bit of a pullback in stocks, specifically the NDX names. The Dow and SPX, meanwhile, trade near their day highs.

I'm not making any specific observations here, just showing more anectodal evidence that the recent run has been liquidity-fed. I think there's an underlying bid in INDU names because of the better macro economic numbers, but as Oracle revealed last week, those macro numbers aren't helping certain sectors of the economy.

  Eric Utley   3/4/02,  11:20:21 AM
I know that Bailey, who is off today, has been tracking Microsoft (NASDAQ:MSFT) in various forms for the last week. A level he was monitoring was $63, which the stock broke above this a.m. That's a new buy signal for the stock and I have worked that into my cautious stance that remains in tech. The print at $63 in Softee will contribute to the NDX bullish percent data when it's summed tonight, which I can't ignore. Link

  Eric Utley   3/4/02,  11:16:39 AM
Specifically in stocks, we're seeing a follow-through of last week's theme: the economy is getting better. The names I'm really focusing on with a bullish bias today are the deep cyclical and transportation names. The Oil Service (OSX.X) group trades very well, as do the Papers (FPP.X) and Cyclicals (CYC.X). Meanwhile, Transports ($TRAN) and Airlines (XAL.X) are blowing up.

I'm ignoring the strength in technology again today and have not participated to the upside in the recent move, still considering this move in tech stocks a short covering rally more than anyting and a product of the massive amount of capital moving into stocks and out of bonds. Such a shift in supply and demand generally lifts all boats, but not indefinitely. What I want to see in tech is at the very least a reversal in the bullish percent data in the Nasdaq-100 ($BPNDX) and some upside work past short-term resistance. That requires, at least for me, a move in the NDX above the 1510 area. It's painful for me to miss the upside in tech, but I'm more comfortable with higher probabilities and easier risk management that has been found away from tech.

  Austin Passamonte   3/4/02,  11:12:06 AM
Today's market action saw a little pullback shortly after the open and then just walked up the charts from there. Looks like indexes are poised to move sideways thru the lunchtime lull as all intraday chart signals are pinned in overbought extreme but could easily stay there all day.

The Dow broke thru a couple measures of key resistance and sits above them now. But with all intraday charts extended sine last Friday, it won't be long before the next pullback begins. Nimble put players should wait for clear signs of bearish failure in 60/30 charts before committing to downside plays. Many traders are trying to short this market at every pause and getting whacked each time it pops higher. Hence the sudden, rapid moves in old economy issues we've seen the past 1.25 trading sessions!

  Eric Utley   3/4/02,  11:08:17 AM
The bond market action through this morning is constructive to this rally in stocks. Although we haven't seen the print at 50.50 yet, the breakout in the Ten year yield (TNX.X) above its recent channel is positive on the economy and stocks. Also, I think the sell-off in bonds over the last two days supports the idea that this rally has been a liquidity-based rise in stocks, with fresh capital flowing from the bond markets.

Through last Friday, we saw two and three day sell-offs in bonds without much accompanying strength in stocks. I think that was a product of capital coming out of Treasuries and skipping over stocks, opting instead for debt, most likely the flood of convertibles we've seen come to market. Conversely, in the last two days, we've seen a serious amount of money come out of Treasuries and most of that capital has moved into stocks.

For this rally to continue, and push the averages above resistance, such as the Dow past 10,500, I think we need to see additional selling in bonds. That would be signaled with a print in the TNX.X above 50.50.

  Eric Utley   3/4/02,  9:51:48 AM
Sector check:

I'm seeing strength in financials this morning, which plays into earlier observations about the bond market. Banks and Brokers are both trading well this morning. The Transports ($TRAN) also trade well, with emphasis on Airlines (XAL.X), higher by 1.31 percent and above 100!

Software (GSO.X) is getting hit off of the Oracle news. The GSO is lower by about 3 percent; Oracle lower by more than 17 percent now. Also seeing weakness in Retail (RLX.X) shares and Drugs.

  Eric Utley   3/4/02,  9:41:18 AM
The biggest development I'm monitoring this a.m. is the sell-off in bonds. The Ten year yield (TNX.X) is close to giving a buy signal on the .50 point box we've been using. We need a print at 50.50 to give the buy signal which, if it comes, would be bullish for stocks and reverse my cautious stance in light of the breakdown in yield a few weeks ago. Again, a print at 50.50 is bullish for stocks Link

  Eric Utley   3/4/02,  9:39:11 AM
Sorry I'm so late with the morning update and posts. I was locked out of the office building this a.m. On with the show...

  Austin Passamonte   3/4/02,  9:08:06 AM
Great Morning!

Quiet opening to the new week. All intraday charts are extended and a move upward in that direction is likely to relax at some point today. No real opinion on market direction right now until we see Friday's closing effect clear this morning.

One thing we do know is that ORCL is off -$2 and Larry Ellison is not gaining on Bill Gates for next year's Forbes ranking. And kudos to the late Sam Walton who if alive today would be worth more than Bill Gates, Paul Allen and Larry Ellison COMBINED!


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