With the deadline for Saddam Hussein approaching, traders have bailed out of profitable positions left and right. Gold, crude oil and bonds have plunged as traders took money off the table. Stocks have rallied the last few days as the uncertainty of war or no war has been removed. There will be a war, it is a question of when. A Friday "after the market closes" start of the war would be best, as 2 full days of bombardment will give us a clearer view of what is going on and whether there is much resistance. If it occurs before then, expect wild swings in the aforementioned markets.

The effect of war on the markets should really be the effect of "which type of war." A quick war with no damage to oil fields and no massive casualty loss (on either side) would see the markets return to some sense of normalcy. If the fields are sabotaged or a weapon of mass destruction is used, expect the plunging markets of this week to be the soaring markets of next week.

If you want to get back involved in markets not affected by the war (directly) look to the grain markets. Bullish corn and wheat hedged by bearish bean positions is an excellent strategy heading into the most important report of the season, the March 31 USDA Prospective Plantings report.

New Trade--June call spread takes advantage of 50% retracement. Gold has completed a 50% correction of the contract high and the contract low. Quite a turnaround from just days ago when it looked like the retracement would be much smaller before exploding higher. Not that it can't explode from here. As with most of the markets, what occurs in Iraq and how fast it occurs will control market direction for the next week or so. For new positions, look at June call spreads to help control risk. Buying the June 340 call and selling the June 360 call for $600 or better appears to be the best choice. Using a spread will allow us to be at the market with the call we own and still allow us a $2,000 winner. If the market tanks, we can exit the call we own and let the 360 call expire worthless. We previously added April 385 calls for $700 and a call spread of the April 365 call we bought for $1100 that was part of a call spread. We closed out the short April 380 call for $200 to lock in a $500 profit on that side of the spread.

News Comments--Dealers said activity had been fairly light throughout the session as players sat on their hands and monitored news reports detailing developments in Iraq. Also keeping gold on a sideways track has been the relatively stable U.S. Dollar versus other currencies and mostly flat equity markets through the day, which also served to keep many players planted on the sidelines. Sources were split over what to expect of gold should military action follow the deadline's expiry, with some expecting prices to tick higher as investors seek a "just in case" safe haven during the tense opening stages of a military campaign. Others, however, predicted gold would wilt as soon as the first bombs fall as the final dregs of gold's uncertainty and war premium get wrung out and speculators look beyond what is expected to be a swift and successful campaign--to the relief rally predicted in the U.S. Dollar and stock markets in the aftermath. However, any weakness in gold is expected to be limited to the $320-325 area over the near term as gold retains its allure as a wealth-preservation tool or counter cyclical asset class while dark clouds continue to hang over the global and U.S. economies.

Refco Global Research last stated, April gold futures remained camped in the 330's awaiting events vis-a-vis Iraq. US/UK troops have moved into the demilitarized zone between Iraq and Kuwait. President Bush's ultimatum expires at 8 pm (Eastern time). Hostilities can be expected soon thereafter, although desert sandstorms may postpone action briefly. Once hostilities commence gold will focus on gauging the likelihood of rapid success in the military operation against Iraq. Early markers to consider are how cleanly US/UK forces seize Iraqi oil facilities and how much resistance is faced in the occupation of Basra. Overall, we think U.S. financial markets have priced in an optimistic scenario. Support for April gold at 332 and resistance at 342.

New Trade--Refco going long! Silver has also moved lower and in fact, is close to challenging contract lows. A hold of contract lows and a significant bounce would be a very strong 'buy' signal. At this point gold is garnering a majority of the attention and that isn't expected to change anytime soon. We previously added the May 500 call we bought for $650. These expire April 24th. Hold off on adding positions until a decent chart move occurs.

News Comments--May silver was 4.3 cents lower on the day at $4.42 to record the lowest settlement for the contract since October 2002. Technically driven fund selling with the aid of pre-placed stop-loss sell orders were behind the early slump, which took place as soon as prices ticked below previous lows in the $4.455 region. Some producer buying emerged at the day's lows to prevent further losses and level off activity in the $4.415-4.443 area, and May held a fairly steady course in that region through the rest of the day. Dealers said that while the $4.40 region should underline activity over the near term, silver is expected to match the overall tone set by gold over the short term. Subsequently, any sharp retreat in the price of gold should also drag silver lower, which if that results in a dip below the $4.40 mark could eye the $4.30-4.35 region as a potential downside target.

Refco Global Research last stated, silver is near 4.40 support and looks over-sold. It is near the bottom of its Bollinger bands. Silver stands to benefit if gold can make headway. That said, the industrial outlook for silver remains suspect. Recent surveys suggest technology buyers are becoming less optimistic in their tech spending plans. The prospect of war is a potential drag on travel, and so on the use of photographic film. In a risky trade we would buy 2 May silver at market. Risk close below 4.35 and expect 4.70.

Refco Research Trade Recommendation--Buy 2 May silver at market. Risk close below 4.35 and expect 4.70.

New Trade--Disaster and economic based position. The stock market rebounded sharply higher since last week's newsletter. This creates a solid level of support between 775 and 790. The weekly chart also shows solid support at those levels. Lost in all the talk of a "war rally" has been the continued deterioration of the U.S. economy. Report after report has continued to show us slipping into a "double dip" recession. Keep that in mind as the situation in Iraq unfolds. Selling into rallies may be the best advice at the levels we are currently at. We previously added the March 790 put which we bought for $2000 and the March 775 put we sold for $1500 for a $500 put spread. These options expire Thursday March 20. Exit the 790 put at the open. New positions of the April 725 put for $500 or better look to be a good disaster position. They exercise into June futures and have until April 17.

News Comments--A late bout of short-covering helped lift the Dow Jones Industrial Average higher in the final hour of trading, but the NASDAQ Composite Index succumbed to weakness after tech giants Oracle and Microchip Technology issued disappointing profit outlooks. War talk dominated the trading floors as many investors opted for inaction ahead of President Bush's 8 p.m. deadline for Saddam Hussein to step down from office or face military action. "The whole market is going to play off the action in Iraq," said Mike Murphy, managing director of equities trading at Wachovia Securities. "The feeling is that the war could start tonight and it's going to be a quick process...but there have been a lot of surprises so far." Earlier media reports indicated that the war may have started already with U.S. troops entering the demilitarized zone on the Kuwaiti-Iraqi border, but the U.S. government denied the reports. News that a small group of Iraqi soldiers surrendered at the Kuwaiti border brought in some buying, traders said, but investors weren't quick to commit to the market until the war declaration is official.

Refco Global Research last stated, S&P's are expected to trade mixed today. The market broke out above key resistance at the 866.00-868.20 range in yesterday's trade and is poised to move higher. In the fluid nature of war-related trade, we favor buying dips at 851.00 and targeting 950.00.

Refco Research Trade Recommendation--None mentioned.

New Trade--Add May 116 call to play the bounce! Bonds reversed very rapidly. Just as the Option Caddie suspected they would in last week's newsletter. After hitting the contract high just over 115, this market hit 11 today. A $4,000 drop since last week! An interesting aspect of this drop is that it is an almost perfect 50% retracement of the rally since mid-January. A normal chart move. Last week the Option Caddie suggested June put spreads. We added the June 112 put for $1325 and the June 110 put we sold for $825 for $500 put spread. This could net a $2,000 winner. The options still have 66 days until expiration and the spread closed at almost $1,000 today. Because of the huge uncertainty of war and the quick profit of this trade, take the $1,000 on the spread for a quick doubling of your money. New positions could look to play the bounce. Add the May 116 call for $500 or better. These exercise into June futures and expire April 26.

News Comments--The bond futures continued a technical trend reversal lower that began Thursday, said Craig Ross, president of ApexFutures.com. "I think it's just profit taking fueled by the move we've seen the last few trading days," said Ross. "People are wanting to take some money off of the table before it gets too much lower. Nevertheless, while prices have plummeted and the bearish picture could remain in tact if the war does go well for the U.S. and its allies, there could be a short-term move higher. I'm looking for a bounce on people buying weakness," he said. A floor contact at the Chicago Mercantile Exchange said this market might have drawn at least some support from a view that the Federal Reserve could still chop interest rates, even though it left them alone Tuesday and did not offer any assessment of the economic risks. The next jobs report will be very important, after we shed those 308,000 jobs (in February), that put into question the (strength of the) consumer, which has been keeping us going. Iraq will remain the market's main focus, particularly as President Bush's 48-hour deadline approaches at 1900 CT (0100 GMT Thursday) for Iraqi President Saddam Hussein and his sons to leave the country or else face a military confrontation. Nevertheless, traders will have several economic indicators to keep an eye on Thursday.

Refco Global Research last stated, bonds are expected to trade mixed today. Going into a war [where seasonals are already played out] makes predictions difficult. However, generally the market should rally if the war does not go as well as expected and should fall if it goes better than expected. Technical support will come from yesterday's spike close while pressure will come from Tuesday's break of the 11215-11217 support range. We favor trading the market as a trading affair.

Refco Research Trade Recommendation--Hold long 10 yr position established on February 3rd at 11212 to 11822.

March 19, 2003

T.J. Jolicoeur, The Option Caddie
Advantages In Options
109 Via Promesa, Paso Robles, California
800-780-7001
www.optioncaddie.com

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