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S&P; 500 Commentary for Thursday, January 2, 2003 S&P; 500  Mar  SPH3 Pattern Signals - an automated pattern recognition process which identifies today's most likely market scenario based on recent price behavior. There are no Pattern Signals fired for today's trading. Pivot System Support & Resistance Levels - used on the floor to determine relative value based on prior day price action. Significant shifts in market psychology often occur near these levels. R3·894   R2·889   R1·884   DP·876   S1·871   S2·863   S3·858 Range Projections - This market will have a tendency to trade within the Normal High/Low Range today as noted below. If those levels are exceeded, use the Extended Range. Normal Extended High 885 890 Low 873 868          Most Recent Trading Day With Pivot System             Historical Volatility & Narrow Range Days            S&R; Levels and 5, 15, and 30 Minute 20EMAs.          Expect range expansion when HisVol is low. TODAY'S S&P; 500 COMMENTARY There are no Pattern Signals fired for today's trading in the S&P.; On the Half Day chart, all three of our Cycle Indicators moved higher from oversold levels with last Tuesday's activity, further confirming last Monday's trading as having marked a short term cyclical bottom. Cycle Indicators imply higher to sideways activity for today's trading. Tuesday's action caused Historical Volatility values to move back to trigger level (chart above right). Historical Volatility is a measure of the degree in which price has fluctuated over a particular period of time. Generally, when a market has gone through a period of contraction, there will be a tendency for volatility levels to increase. And sometimes that increase can be very sudden and dramatic. These kind of low Historical Volatility readings have us on lookout for the development of wide-range days which trend in a single direction - the kind of days that are well-suited for capturing large profits. Economic reports on today's agenda include State Unemployment Initial Claims at 7:30CT, and the Purchasing Manager's Index at 9:00CT. ADX levels on 5 and 15 minute charts are below a value of 18 (see ADX charts below). When this occurs, we know that it is a good time to keep an eye out for any developing triangles, wedges, flags, or channels in the respective time frames. We can use breakouts from these patterns as either a trigger into a trade or to help determine directional bias. It would be best to enter today's trading without any directional preference. Instead pay close attention to market action relative to important support and resistance levels. In today's early going, pay particular notice to price behavior in relation to the 876.00 Daily Pivot. Significant activity above this level will imply further upside. Activity below will hint at further downside. Approach today's trading with an open mind and a willingness to let immediate price behavior, coupled with oscillator divergence, tell us which way and how far the market wants to go. 20 PERIOD EXPONENTIAL MOVING AVERAGE AND 14 PERIOD ADX ADX>18 indicates ambivalence: use chart pattern breakouts to help determine directional bias. ADX>30 defines trend moves in that timeframe: watch for retracements to the 20EMA. The colored bar under ADX represents trend direction.

Nasdaq 100 Commentary for Thursday, January 2, 2003 Nasdaq 100  Mar  NDH3 Pattern Signals - an automated pattern recognition process which identifies today's most likely market scenario based on recent price behavior. NR4 Signal (narrowest range of the last four days) This signal indicates that range expansion is highly likely. If, during the day, yesterday's high is exceeded then either buy the breakout (aggressive) or buy the retracement to the breakout (conservative). If, during the day, yesterday's low is exceeded then either sell the breakout (aggressive) or sell the retracement to the breakout (conservative). 2 Day ROC Buy Pivot System Support & Resistance Levels - used on the floor to determine relative value based on prior day price action. Significant shifts in market psychology often occur near these levels. R3·1015   R2·1006   R1·996   DP·988   S1·978   S2·970   S3·960 Range Projections - This market will have a tendency to trade within the Normal High/Low Range today as noted below. If those levels are exceeded, use the Extended Range. Normal Extended High 996 1003 Low 978 971          Most Recent Trading Day With Pivot System             Historical Volatility & Narrow Range Days            S&R; Levels and 5, 15, and 30 Minute 20EMAs.          Expect range expansion when HisVol is low. TODAY'S NASDAQ 100 COMMENTARY We have two Pattern Signals fired for today's trading in the Nasdaq 100, the first of which is the NR4. This signal tells us that the market has gone through a period of contraction with Tuesday's range being the narrowest of the last four days. If the market were thought of as a spring gradually being compressed, this signal represents a potential trigger point for releasing that pressure. A good clue as to if and which direction it might break can be determined by today's market action near Tuesday's 997.00 high and 979.00 low levels. A break of either is a likely indication of the new trend direction out of this contraction period. An aggressive trader can enter on the break. A conservative trader might want to wait until a return to the breakout level, which often happens before a sustained move begins. Some initial clues to breakout direction can often come from early rejections of these levels. If the high is approached, repelled, and price then moves through the DP, the likely breakout direction is the low. Likewise, if the low is approached, repelled, and price goes through the DP from below, the likely breakout direction is the high. Another clue can often be found in price action near the DP. If price is unable to move through this level, the likely breakout direction will be the same side as it originated. The second signal fired for today is the 2 Day Rate Of Change Buy. This signal is the Raschke and Connors way of quantifying the swing trading methods as taught by the Taylor Trading Technique. This technique teaches that there is a natural pattern to the sequence of buy and sell days. The 2 Day ROC Buy signal is telling us to expect today to be the "buy day" part of that pattern. Tuesday's action caused Historical Volatility values to move even further below trigger level (chart above right). Historical Volatility is a measure of the degree in which price has fluctuated over a particular period of time. Generally, when a market has gone through a period of contraction, there will be a tendency for volatility levels to increase. And sometimes that increase can be very sudden and dramatic. These kind of low Historical Volatility readings have us on lookout for the development of wide-range days which trend in a single direction - the kind of days that are well-suited for capturing large profits. On the Nasdaq 100 Half Day chart, the 5 period Double Stoch moved higher with Tuesday's activity, the 10 period Double Stoch moved lower, and the 7 period %K moved sideways. Cycle Indicators appear to have entered into a period of mixed behavior. We should wait until they've had a chance to normalize and return to more normal short term cyclical behavior before using them to help determine any sort of directional bias. Economic reports on today's agenda include State Unemployment Initial Claims at 7:30CT, and the Purchasing Manager's Index at 9:00CT. The ADX level on the 60 minute chart is above a value of 30, indicating that the trend to lower prices is still intact in this timeframe (see ADX charts below). If we were triggered into a short position by a price reversal pattern and/or Oscillator Divergence near the 20EMA in the 60 minute timeframe, we would have the makings of a Holy Grail setup. A trade based in part on a Holy Grail pattern can take as its minimum profit target a return to the most recent swing pivot extreme, which would be Tuesday's 979.00 low. If the move to that level can occur on Momentum Confirmation, there should be even more downside in the making. The ADX level on the 15 minute chart is below a value of 18. When this occurs, we know that it is a good time to keep an eye out for any developing triangles, wedges, flags, or channels in the respective time frames. We can use breakouts from these patterns as either a trigger into a trade or to help determine directional bias. All things considered, the NR4 signal will likely be the real key to today's trading. Whenever a Narrow Range Day Pattern Signal fires we can go into the trading day with two key pieces of information at our side. 1) We know that in all likelihood, price activity should essentially trend in one primary direction. And (2) clues to the direction of the potential trend day breakout will most likely be determined by price action relative to the prior day's high and low, and to today's DP as described above. 20 PERIOD EXPONENTIAL MOVING AVERAGE AND 14 PERIOD ADX ADX<18 indicates ambivalence: use chart pattern breakouts to help determine directional bias. ADX>30 defines trend moves in that timeframe: watch for retracements to the 20EMA. The colored bar under ADX represents trend direction.

US T-Bond Commentary for Thursday, January 2, 2003 US T-Bond  Mar  USH3 Pattern Signals - an automated pattern recognition process which identifies today's most likely market scenario based on recent price behavior. 2 Day ROC Sell Wide Range Downside Reversal: The current bar has the highest high and widest range of the last 5 bars and the close is within the bottom 25% of the range. Look for shorts. 90-10 Low Continuation: Morning follow through on yesterday's weak close is likely. Look for shorts. Momentum Pinball Buy: If price action is strong enough to break the first hour high, then a bullish bias should be assumed. Look to either buy the breakout (aggressive) or buy the retracement to the breakout (conservative). Pivot System Support & Resistance Levels - used on the floor to determine relative value based on prior day price action. Significant shifts in market psychology often occur near these levels. R3·115´02   R2·114´09   R1·113´15   DP·113´01   S1·112´07   S2·111´25   S3·110´31 Range Projections - This market will have a tendency to trade within the Normal High/Low Range today as noted below. If those levels are exceeded, use the Extended Range. Normal Extended High 113´10 113´25 Low 112´02 111´19          Most Recent Trading Day With Pivot System             Historical Volatility & Narrow Range Days            S&R; Levels and 5, 15, and 30 Minute 20EMAs.          Expect range expansion when HisVol is low. TODAY'S T-BOND COMMENTARY We have four Pattern Signals fired for today's trading in T-Bonds, the first of which is the 2 Day Rate Of Change Sell. This signal is the Raschke and Connors way of quantifying the swing trading methods as taught by the Taylor Trading Technique. This technique teaches that there is a natural pattern to the sequence of buy and sell days. The 2 Day ROC Sell signal is telling us to expect today to be the "sell day" part of that pattern. The second Pattern Signal fired for today's trading is the Wide Range Downside Reversal. This signal is activated when three conditions have been satisfied: 1) the high of the day is the highest high of the last five, 2) the trading range of the day is the widest range of the last five, and 3) the close is within the bottom 25% of the day's range. This signal typically marks significant short-term market turning points. The third signal fired for today is the 90-10 Low Continuation. This signal originates from the 80-20s set-ups as described in "Street Smarts". But, rather than using the 80-20 guidelines, the parameters have been narrowed to 90-10, thus reducing the pattern's frequency of occurrence, but increasing its probability as a forecasting tool. The 90-10 Low Continuation signal is fired when the day's close is within the bottom 10% of the day's range. This signal is telling us to expect morning continuation of the downmove. The last Pattern Signal fired for today's trading is the Momentum Pinball Buy. The Momentum Pinball Buy and Sell Signals represent an attempt to identify potential periods of very short term buying and selling exhaustion so as to capture a possible move in the opposite direction. Before any action is taken, however, the Momentum Pinball Buy signal requires a breach of the first hour high for confirmation. Because Momentum Pinball Buy/Sell signals are intended to flag the end of a short term trend, it is not unusual to see, on the same day, other Pattern Signal firings which indicate likely movement in the opposite direction. When this occurs we know that a break of the first hour high/low represents a market bias in the opposite direction as originally indicated by other Pattern Signal firings. On the T-Bond Half Day chart, all three of our Cycle Indicators moved lower from overbought levels with Tuesday's activity. Of greatest significance is the downturn in the 7 period %K. A turn of this indicator from its overbought or oversold zone is usually a good indication that a new trend has begun and at least several more bars of new short term direction should follow. Economic reports on today's agenda include State Unemployment Initial Claims at 7:30CT, and the Purchasing Manager's Index at 9:00CT. ADX levels on 5 and 15 minute charts are above a level of 30, indicating that the trend to lower prices is intact in these timeframes. But the ADX level in the 120 minute timeframe indicates a working trend to the upside (we don't consider the 30 and 60 minute timeframes to be working trends because their 20EMAs have already been violated). It is unusual, but not impossible, to have active working trends in opposite directions. It indicates a quick turnabout in the shorter timeframe that may or may not have enough strength to continue. If the 5 or 15 minute 20EMAs are able to contain the price action to the downside we'd have to respect that as a bearish sign. But we'd also have to recognize the potential for the 120 period 20EMA to have a bullish effect. The trends of the larger timeframes generally have greater influence than those of the shorter. All Pattern Signals indications are towards lower prices, with Tuesday's action having most likely marked a short to intermediate-term swing pivot high. The ideal scenario would entail a normal corrective reaction towards one of the resistance levels above current price, the most significant being that of the 113-01 Daily Pivot. A price reversal pattern and/or Oscillator Divergence in this region can trigger us into the trade with the likely target being yesterday's 112-18 low. If the move to that level can occur on Momentum Confirmation, there should be even more downside in the making. Also, keep in mind that the Momentum Pinball Buy signal is flagging potential short term downtrend exhaustion with a possible move in the opposite direction. If today's first hour high is breached we'd want to more seriously consider a bullish bias. The aggressive trader can enter on the break. The more conservative might want to wait until a return to the breakout level, which often happens before a sustained move begins. As always, our most confident entries are accompanied by Reversal Patterns and/or Oscillator Divergence along known levels of support. 20 PERIOD EXPONENTIAL MOVING AVERAGE AND 14 PERIOD ADX ADX<18 indicates ambivalence: use chart pattern breakouts to help determine directional bias. ADX>30 defines trend moves in that timeframe: watch for retracements to the 20EMA. The colored bar under ADX represents trend direction.