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IN THIS WEEK'S ISSUE:

1. MARKET SUMMARY  
2. WEEKLY ETF PERFORMANCE  
3. THIS WEEK'S TRADES  
4. CONTINUED GUIDANCE ON PREVIOUS TRADES  

We urge all readers to print out this newsletter each week for maximum benefit...

1. MARKET SUMMARY

U.S. equities posted their largest weekly gain since the rally following the bottom set shortly after the terrorist attacks on September 11, 2001. The gains leave the market approaching overbought levels and in important resistance areas. The S&P 500 has now moved higher for eight consecutive sessions. The last time the S&P 500 rose for nine straight days came in June 1997. However, the gains, on a percentage basis, were far smaller at that time.

There are definitely some positive signs with recent market activity:

• Strong volume
• Relatively orderly gains (as compared with the turns in October and July 2002)
• Implied volatility remains high, which means market participants do not believe in this rally
• Momentum divergences were seen at the lows

While it is too soon to call a final bottom as being in (and I don't believe it is), the probability is increasing that the next major leg down might not start until next year. Failure to collapse almost immediately would confirm that thinking.

THE WEEK IN REVIEW
My expectation for a break above resistance in the 852.87 area for the S&P 500 came true. In fact, the gains easily exceeded my upper targets, which were near 880, and have now pushed above the 62% retracement of the drop from the December 2002 peak.

The news was all friendly for stocks from the war front (and war is all the markets currently care about). However, my one short-term concern is that the markets are pricing in a nearly perfect resolution to the war, followed by an immediate and powerful Global Exhale that will cure all of the world's ailing economies in short order.

ECONOMIC ANALYSIS
As expected, the Fed chose not to cut interest rates last week. I had thought they might change their bias to easing, but instead they decided to wait until the dust clears in Iraq. I applaud this decision, although I am concerned that it could be a prelude to rate hikes sooner than really should be done. I am starting to see rhetoric making fun of those worried about deflation, which is a sure sign that the risk is growing that policies could attempt to choke off inflation. This, in turn, could cut off any economic recovery at its inception. That said, I do not think the Fed will raise rates anytime soon, though the odds suggest that you can make money on bets that the market will continue to price out rate cuts going forward.

Last week's other data were of limited importance. The Philly Fed survey was weaker than expected, but the market will discount pre-war weakness anyway. CPI was friendly as well, in line with expectations.

Next week sees consumer sentiment. Near-term gauges such as the ABC Money Poll will be more important to see whether the good news from Iraq is showing any follow through. I'd also like to see chain store sales improve. Durable goods orders are expected to be weak, with consensus at -1.0% to -2.0%. I expect the actual data will come in better than those figures, though ex-defense could be weak. The final revision to Q4 GDP is due and should be of little interest.

WHERE DO WE GO FROM HERE?
Although the gains last week were impressive, I am not all that confident that we can continue the rally early in the week. We are moderately overbought and should retrace some. However, at this point, barring a very powerful reversal, I would take advantage of any market dips by entering into long trades.

I've included a new format in this week's issue. In addition to my regular short-term ETF trading ideas, I'm also going to present you with ideas for longer-term trades that could bring far greater returns. As you will see below, the short-term trade I recommend will attempt to take advantage of expected market weakness early in the week. Following this, my long-term trade is aimed at taking advantage of a continuation pattern that should break lower in a sector that will be hurt by war's end.

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2.  WEEKLY ETF PERFORMANCE

Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...

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3.  THIS WEEK'S TRADES

SHORT-TERM ETF TRADING IDEA:

SELL SHORT RETAIL HOLDRS (RTH, $74.20) AT THE OPEN ON MONDAY 

The stock market has been on fire recently, and there is no sector more overbought right now than retail stocks. While picking a top is always a dangerous game, a 17% rally in eight trading days leaves this ETF at risk of at least a moderate correction. I am not in any way suggesting that this ETF is going to collapse. Prices broke out of a beautiful base that traversed the February 13th to March 13th period. However, now is the time to look for a correction. Here's why I want to sell:

• RSI is very overbought at 74. The stock market has been up for eight straight days. It is due for a correction and this overbought ETF is likely to underperform during that corrective period.
• Friday's high of $74.20 was just $0.02 below the 2.618 Fibonacci extension target for wave-3 as compared to wave-1. I doubt that we can get to the 4.236 extension, which comes in at $81.00. That would equate to a nearly 10% additional gain.
• Intraday momentum (not shown) shows divergences, meaning that prices are not confirming the gains.
  

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RECOMMENDATION:

SELL RTH SHORT at the open on Monday as long as the ETF opens between $73.95 and $74.50.
TARGET:  $71.62 is our initial target, but I might let it extend to $70.02 via a News Flash later in the week
STOP:  $75.10

Remember: RTH is a HOLDR. That means that you cannot trade an odd-lot here. Sell 100 shares only. Assuming you sell at $74.20, Friday's close, and exit the trade at our $71.62 target, you will make $258, or +3.6%.

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LONG-TERM ETF TRADING IDEA:

SELL SHORT THE ENERGY SPDR (XLE, $22.38)

Stocks are due to dip, and oil is getting clobbered. Although a recovery in the stock market will help, much of those gains will be due to victory in Iraq, and that is going to mean weaker oil prices. Couple that with an expected correction in stocks and the technical reasons shown below, and you can see why XLE is a good short. Here's why I think it's headed lower:

• Touched weekly triangle resistance and moved away from it.
• Poor relative strength compared to the rest of the market. Its 2.7% gain last week was the second worst of the equity-linked ETFs I track.
• Huge wall of resistance from weekly RSI near 50. The trend remains neutral to down.
• Almost perfect five-leg triangle in Elliott Wave terms, with last week's touch on the 34th week of the pattern. 34 is a Fibonacci number and that is important in Elliott Wave.

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RECOMMENDATION:

SELL XLE SHORT at the open on Monday as long as it opens in the $22.22 to $22.65 range.
TARGET:  $19.54
STOP:  $23.40

Sell 200 shares of XLE. Assuming a sale price at Friday's $22.38 close and a buy back at $19.54, that would equate to a $284 profit, or +12.7%.

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4. CONTINUED GUIDANCE ON PREVIOUS TRADES

PREVIOUS SHORT-TERM IDEAS:

BUY FINANCIAL SPDRs (XLF, $22.12)
DATE ENTERED:  03/17/2003
ENTRY PRICE:  $20.35
CURRENT PRICE:  $22.12
TARGET:  $21.09
STOP:  $20.24
GAIN/LOSS:  +3.6%
We closed this trade for a quick +3.6% gain on 3/17/2003 when the shares hit our $21.09 target.

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SHORT S&P 500 SPDRs (SPY, $89.67)
DATE ENTERED:  03/17/2003
ENTRY PRICE:  $85.82
CURRENT PRICE:  $89.67
TARGET:  $81.55
STOP:  $86.63
GAIN/LOSS:  -0.9%
We closed this trade for a small –0.9% loss after the shares hit our stop on 3/17/2003.

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SHORT ENERGY SPDRs (XLE, $22.38)
DATE ENTERED:  03/17/2003
ENTRY PRICE:  $22.06
CURRENT PRICE:  $22.38
TARGET:  $21.06
STOP:  $22.18
GAIN/LOSS:  -0.5%
We closed this trade for a small –0.5% loss after XLE hit our stop on 3/17/2003.

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Thanks again for reading this week's issue, and good trading in the week ahead!

Good trading in the week ahead!

Steven W. Poser
Steven Poser
Editor
The ETF Authority
New York, NY

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