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IN THIS WEEK'S ISSUE:

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

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

1. MARKET SUMMARY

The stock market fell sharply last Monday and then spent the remainder of the week trading sideways. Equities were largely buffeted by the changing winds in Iraq, as market participants adjusted to the idea that the war may stretch on for several months. With those thoughts largely priced in, the larger technical patterns should start to take hold in the immediate future, albeit with periodic volatility caused by real or imagined news from the battlefront.

THE WEEK IN REVIEW
The lack of volume on Monday was a warning that prices would not be terribly likely to follow through immediately lower. The market's ability to avoid major losses, despite the clear failure of market participants to understand how the war with Iraq was likely to develop a priori, is a sign that stocks are not likely to collapse in the immediate term. It appears as if it will take a huge surprise to move equities out of the broad range in which they've traded since October 2002. With stocks in the middle of that range right now, directional trades are difficult. However, I will present several trading ideas below that should be profitable.

ECONOMIC ANALYSIS
The stock market, as well as the bond market, is largely ignoring economic data right now, favoring instead to tune into Fox News and CNN for battlefield updates. However, by Friday that focus was starting to shift again, and I suspect that economic data will start to move to the fore again in the coming weeks. It was easy to ignore the data last week, as the only major release (outside of the final revision of fourth-quarter 2002 GDP) was the durable goods report, which came in at -1.2% -- the high end of consensus expectations. There was a good deal of talk about the sharp drop in existing home sales, but the result actually was above economists' forecasts.

This week will see several important data points. Monday starts with the Chicago PMI, which is expected to slide about three points from February's level. National ISM release is also forecast to weaken, falling below 50 to 49.1. I suspect both figures could come in below expectations, although the data would need to be somewhat worse than expected to have a significant impact on the markets right now.

The key data item next week will be non-farm payrolls. Market consensus is for flat to a loss of 50,000 jobs. Bad weather early in the month of March may impact the data negatively. However, following last month's horrible loss of 308,000 jobs, I suspect that a small positive number is possible. Watch for a drop though in construction, which could turn the result to the minus side. The unemployment rate might improve by 0.1%.

WHERE DO WE GO FROM HERE?
Stocks lost a decent amount of ground last week, but the losses were not nearly as powerful as the gains were during the eight-day rally prior to last Monday. And, despite the fact that stocks fell on Friday, market breadth was actually positive. There is definitely room for a bounce from here, especially with very negative expectations for this week's economic data. However, I still do not have any signs of a huge rally, and would be much happier finding a bearish bandwagon to jump on. I am still looking to sell rallies, except in Japan where the charts are starting to look more constructive.

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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.  ETF RELATIVE STRENGTH MONITOR

In an effort to continually improve upon our services, I've added a new section to The ETF Authority starting this week. Those of you familiar with Investor's Business Daily have probably heard about the concept of relative strength. Hint -- This is not Welles Wilder's RSI (relative strength index), which I sometimes show in my charts.

The concept of relative strength compares how a given asset's performance compares to others in its class. Our new ETF Relative Strength Monitor will show the percent gain or loss posted by each of the 23 ETFs we follow in The ETF Authority in the most recent one-week, four-week and thirteen-week (quarterly) periods.

I have also created a proprietary ranking system and have assigned a unique ranking to all 23 of these ETFs. The strongest ETF will receive a rank of "23", while the weakest will get a score of "1". In addition, the table will show the change from the prior week and the average proprietary score over the past four weeks.

In the coming weeks, I will spend time evaluating the monitor in this section and will often recommend trades based on the information gleaned from its data. This information may, for example, assist us in highlighting possible spread trades (long one ETF while short another). Furthermore, I plan to use the ETF Relative Strength Monitor to pinpoint those ETFs that are either overbought, oversold, or breaking out.

So, without further ado, here is this week's ETF Relative Strength Monitor...

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4.  THIS WEEK'S TRADES

SHORT-TERM ETF TRADING IDEA:

SELL SHORT iSHARES NASDAQ BIOTECHNOLOGY FUND (IBB, $52.10)

The Biotech iShares actually sit atop my proprietary monitor this week. However, what goes up often must come down. After just about nailing a fifth-wave target on Friday, IBB put in a Candlestick shooting star, which is a bearish reversal sign. Add to that momentum divergences, and you have a pretty good reason to be nervous if you currently hold IBB. If stocks fall sharply, then this somewhat over-extended ETF should take a quick tumble. Even a small 38.2% retracement would take prices down to $50.25, which would equate to a nearly +4% gain!

In summary, our reasons for shorting IBB are as follows:

• Shooting star Candlestick on Friday.
• RSI momentum divergence.
• Five-wave rally likely completed with large retracement forecast.
• IBB is at the top of our proprietary indicator and is not likely to hold that ranking for much longer. The fund has posted a four-week return of 8.9%, which is best in our 23 ETF universe.

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RECOMMENDATION:

SELL 100 SHARES IBB SHORT on Monday as long as it opens in a range of $51.82 to $52.60
TARGET:  $49.43
STOP:  $53.10

Assuming you sell at $52.10, Friday's close, and exit the trade at our $49.43 target, you will pocket a $257 gain from this trade, or +5.1%.

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LONG-TERM ETF TRADING IDEA:

BUY THE JAPAN WEBS (EWJ, $6.68) ON A FURTHER PULLBACK

There's a decent chance that the Japanese stock market has made a major bottom. My technical work on the Nikkei-225, the major Japanese stock market index, shows that its recent low was very close to a long-term Elliott Wave-based target.

However, there are several risks that you should be aware of: (1) It is fiscal half-year-end on Monday and the Bank of Japan (BoJ) is expected to help keep prices strong into that timeframe. This is meant to help banks with their balance sheets since they have to mark their equity holdings to market. Once that passes, the BoJ support may disappear. (2) Fiscal half-year-end also typically ends the expectation for a strong yen. A strong yen helps U.S. dollar-based accounts since it raises the value of Japanese holdings in dollar terms. That said, all of this information is well known and should be what we are seeing in the chart already.

The reasons I want to buy EWJ are:

• Long-term target reached in Nikkei-225.
• U.S. dollar looks weak, which will help EWJ.
• Five-wave rally completed.
• ADX at very low level and should fall as EWJ falls a bit more. Should start rising soon with break higher.

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RECOMMENDATION:

BUY 1,000 SHARES OF EWJ at $6.56 (but not below $6.50 on a gap)
TARGET:  $7.16
STOP:  $6.43

Buy 1,000 shares of EWJ. Assuming a purchase price of $6.56 and a sale at our $7.16 target, the profit from this trade would be $660, or +9.1%.

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5. CONTINUED GUIDANCE ON PREVIOUS TRADES

PREVIOUS SHORT-TERM IDEAS:

SHORT RETAIL HOLDRs (RTH, $71.05)
Although I was correct in my bearish stance on RTH last week (only three of the 23 ETFs I follow performed worse), the HOLDRs gapped open below my sell area, so the trade was not executed. I attempted the trade again on Thursday, with the same result.


PREVIOUS LONG-TERM IDEAS:

SELL SHORT ENERGY SPDRs (XLE, $22.68)
DATE ENTERED:  03/24/2003
ENTRY PRICE:  $22.41
CURRENT PRICE:  $22.68
TARGET:  $19.54
STOP:  $23.40
GAIN/LOSS:  -1.2%

Although XLE finished the week higher in a down market, the gains were rather moderate.Weekly RSI is now just a shade above 50 and prices sit a fraction below the large triangle shown in the chart below. The last time RSI was this high was when XLE bounced off resistance from a smaller triangle in May 2002. XLE has been one of the stronger ETFs recently (only four have higher scores out of the 23 I track according to my proprietary indicator above). Given that the overall trend is neutral and I do not expect a breakout higher based on patterns and Elliott Wave structure, this relative strength is not likely to be sustainable. Look for a run at least to triangle support ($20.88) this week or next.

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

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

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