U-Turn

Now then — if for some reason the market fails overnight and we open
lower, we might be in for a beauty because some very DANGEROUS chart patterns
were left today in the Nasdaq composite
(
$COMPQ |
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PowerRating) and the
(
QQQ |
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you candlestick fans. It might be wise to simply observe the first half of the
day and wait for the market to tell you what it is going to do…

Well, the market has reversed overnight and is now in a precarious position.
European stocks fell after Ericsson AB reported lower sales, helping turn the
Microsoft tide lower overnight. When last we met, DJI futures were up in
the 8340 area, S&Ps were near 889.00, and the Nasdaq 100 futures were
trading up at 968 and change. Now the DJI futures are trading at 8210, down
45.0, the S&P futures are 874.40, down 4.60, and the Nasdaq 100 futures are
trading 939.00, down 5.50. In Europe, The FTSE 100 is down 84.80 points, or
2.03%, the DAX is 52.81 lower for a loss of 1.66%, and the CAC 40 is 57.84
points, or 1.82% lower. The dollar is unchanged, and the treasury market is
quiet, as are gold and crude oil.

In economic news, headline CPI came out right on the nose, up 0.2%, and the core
came in a tad lower, up 0.1% vs. an expected rise of 0.2%. No harm there, but
once again, the trade balance continued to worsen, coming in at a $38.5B deficit
vs. an expected $35.0B deficit. I am looking to short the dollar again by the
end of the year.

With the reversal taking place last night, it looks as though the recent rally
may have stalled out. It is expiration day today, and anything could happen, but
if the market closes lower today, we will have gone a long way toward defining
what I feel will be our trading range. Volatility should continue to fall
regardless of whether we go up or down, as the bulls have been whipped and the
bears have been whipped, and everyone is tired. Yesterday we started to explore
possible ranges for butterflying the QQQ and the DIA, and we will continue that
dialogue in the Alerts! today.

Volatility

Volatility dropped yesterday as Big Blue’s mystery passed, but
there was still enough angst about MSFT to keep a bid in the market. Today we
should see a large decline no matter which way we go. On the day, the VIX fell
1.82 to 40.15, the VXN dropped just .65 to 56.22, and the QQV fell 1.48 to
48.06.

Update: (10/17/02)

WAG — Bought the WAG January 35 puts at $3.00 (25%).

New Recommendations

QQQ — Sell the January 23/26 call spread at $1.50 — Suspended!

CCU — Sell the January 50 calls at $1.00 against our long January 40
calls to go into a bull spread. We want to avoid being naked long options as we
come out of the earnings period as volatility could take a tumble.

Buy-writes

HAL — Long the January 15 buy-write at $12.05 (100%).

Proxy buy-writes

DYN — Long the January 15 calls at $3.20 — left over from proxy buy-write
(50%). Left for dead.

Complex Strategies

CCU — Long the January 40 calls at $2.00 (50%).

Call Spread Positions

WAG — Long the January 35 puts at $3.00 (25%).

Spread Positions