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Daily Newsletter, Monday, 10/13/2003

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The Option Investor Newsletter                   Monday 10-13-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: A Wave of New Highs
Futures Wrap: Columbus Day Trading
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     10-13-2003            High     Low     Volume Advance/Decline
DJIA     9764.38 + 89.70  9783.49  9675.57 1.28 bln   2058/ 747
NASDAQ   1933.53 + 18.22  1940.97  1921.96 1.48 bln   2154/ 928
S&P 100   523.01 +  2.92   523.01   518.05   Totals   4212/1675
S&P 500  1045.35 +  7.29  1048.90  1038.06
RUS 2000  527.57 +  8.51   528.91   519.06
DJ TRANS 2874.72 + 51.17  2881.65  2822.41
VIX        17.55 -  0.90    17.91    17.42
VXN        26.77 -  0.35    27.20    25.97
Total Volume 3,039M
Total UpVol  2,173M
Total DnVol    816M
52wk Highs    1031
52wk Lows       14
TRIN          0.80
PUT/CALL      0.62
*******************************************************************

A Wave of New Highs
by James Brown

The first full week of Q3 earnings season is underway and the
markets celebrated with another round of new highs.  The DJIA
closed above the 9700 level for the first time since June 2002.
Broader indices like the NASDAQ Composite set a 19-month high,
the S&P 500 closed at a 16-month high and the Wilshire 5000 index
also closed at its best levels since June 2002.  Volume was very
light today but it was expected with the Columbus Day holiday.
Contributing to a lack of action were the quiet bond markets,
closed for the U.S. holiday and the Japanese markets were closed
for their own local holiday.

Overall the general feeling remains optimistic as investors
position themselves ahead of what is expected to be a very good
earnings season.  One of Prudential's analysts mentioned that the
three dozen plus S&P component companies who have already
reported have on average been beating consensus estimates by 11
percent or better.  That's exactly what investors want to hear.
Current estimates are for Q3 earnings to be up 16 percent from
last year.  If businesses are beating the Q3 estimates by 10
percent or better then Wall Street can put more hope in the Q4
estimates for 20 percent profit improvement and that might
actually keep the rally going.

The buying pressure was pretty broad today.  Only one major
sector index, the OSX oil services index, closed in the red.  The
strongest buying was concentrated in Transports, Disk Drives,
Software, Banks, Brokers and Gold stocks despite a small drop in
December gold futures.  The U.S. markets enjoyed a positive tail
wind from their European counterparts with the English FTSE up
1.2% and the German DAX up 1.9% today.  American markets posted
strong advance/decline numbers with 20 winners for every 7 losers
on the NYSE and 21 winners per 9 losers on the NASDAQ.  Up volume
was more than three times down volume on the big board (NYSE) and
better than twice down volume on the NASDAQ.  New 52-week highs
hit 633 to just 10 new lows between the two exchanges.

Chart of the DJIA:




Chart of the NASDAQ:




As would be expected during the onset of earnings season stocks
were battered about by announcements and new analyst ratings.
The three biggest stories today appeared to be Motorola (MOT),
Honeywell (HON) and eBay (EBAY).  MOT made headlines by
announcing their Q3 results one day early.  The company announced
prior to the opening bell in response to a credit downgrade from
Moody's, who cut MOT's rating from Baa2 to Baa3 over concerns
from strong competition and revenue weakness.  Surprisingly, MOT
beat consensus estimates of 3 cents with 6 cents a share,
excluding charges.  Even more unexpected was MOT's positive
guidance for the fourth quarter.  Analysts had been expecting Q4
numbers to fall near 12 cents a share on revenues of 7.41
billion.  Motorola now expects Q4 earnings in the 11 to 15 cent
range on revenues closer to 7.8 billion.  However, even the good
news did little to assuage investors' fears with MOT's credit
rating now just one level above junk.  The stock added 8 cents to
close at $13.87.

The best performer among the Dow Jones components was Honeywell
(HON), which jumped 4.6% on a positive article in Barron's over
the weekend.  Barron's highlighted the company and said the stock
offers a very attractive valuation given what they see is a
bottom in the manufacturer's business and a recovery in the
global economy.  With a forward-looking P/E of less than 16 the
company is significantly under valued compared to the S&P's
average P/E near 29.  HON should announce earnings on Thursday
morning with consensus estimates looking for 40 cents a share.

Another headliner expected to announce on Thursday is EBAY.  The
online auctioneer was rattled for a 2.4 percent loss after a
Smith Barney analyst downgraded the stock from a "hold" to a
"sell".  Problematic was the term analyst Lanny Baker used to
describe EBAY's eBay Motors pricing model after surveying 150 car
dealerships.  The survey found that 30% are using the service but
40% used to but are no longer using EBAY's used-vehicle auctions.
Whether a survey of 150 car dealers out of the 80,000 dealers in
this country is enough research is an argument enthusiastic bulls
will have to carry.  We've mentioned in the past that EBAY is
richly valued with a current P/E near 125 and any upset in its
execution could wreak havoc on the stock price.  Yet today's
downgrade was not met with sharp selling but dip buying.  The
stock quickly rebounded from its early morning lows to bounce
from old resistance, now new support in the $57.00-57.50 range.
The intraday rebound probably isn't a surprise considering that
EBAY's execution is not only on track but apparently one-year
ahead of schedule.  Look for EBAY to report after the bell on
Thursday.  Estimates are for 18 cents a share.

But enough about companies announcing on Thursday.  The markets
have plenty to watch tomorrow.  Announcing earnings before the
opening bell are several big cap stocks that could set the tone
for the rest of the day.  Many of them are bank stocks and
economists will be listening to hear if loan demand has been
picking up with the improving economy.  The third-biggest U.S.
bank by assets is Bank of America (BAC).  Estimates for BAC are
$1.70.  Another big financial announcing tomorrow morning is
Merrill Lynch (MER).  We've already heard from the rest of Wall
Street's big brokers and they've all beaten estimates, some by a
wide margin.  If MER doesn't turn in the same kind of results the
XBD, currently at a fresh 52-week high, could easily see some
strong profit taking.  Estimates for MER are 85 cents a share.
Dow component Johnson and Johnson (JNJ) also announces before the
bell.  Estimates for JNJ are 68 cents.  Another big announcement
could be Delta Airlines (DAL).  Estimates for DAL are for a loss
of $1.47/share.  With all the positive press the airlines have
been getting in recent weeks I wouldn't be surprised in the least
to hear DAL beat that number.

After the bell we'll hear from Dow component Intel Corp (INTC).
The semiconductor titan has already raised guidance twice this
quarter so investor expectations are probably pretty high.  If
INTC doesn't beat the estimates of 23 cents the SOX is likely to
take a dive on Wednesday and the index is already fighting with
resistance at 475 creating a potential double-top.

Stay nimble and watch your stop losses.  Earnings season can be
dangerous with the potential for big gap opens in the morning
that make stops hard to juggle.


************
FUTURES WRAP
************

Columbus Day Trading
Jonathan Levinson

With the bond market closed and the Fed resting on Friday’s 9B 6-
day repo, there wasn’t much to see as equities pushed at the
previous highs and held just below them in a very light volume
session.  Gold had an exciting reversal off its lows to close in
the green.


Daily Pivots (generated with a pivot algorithm and unverified):



Note regarding pivot matrix:  The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula.  They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm.  Do not think of them as market "calls"
or predictions.  Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions.  Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.

15 minute chart of the US Dollar Index




The US Dollar Index ramped up overnight, reaching resistance at
92.40 before backing off to fade gradually lower as the session
wore on.  Metals and the CRB finished higher, with the HUI up 5.08
to 202.65, XAU +2.23 to close at 93.29, and the CRB, led by lean
hogs, copper and soybeans, added 1.46 to close at 247.75.


Daily chart of December gold




December gold touched a low of 367.90, higher than the previous
spike low of 364, and bounced to finish up .90 at 375.  The move
was enough to tentatively turn the 10 day stochastic sideways in
its ongoing downphase.  Fib resistance at 379 matched the high of
the day, and will have to be cleared to give goldbugs a chance at
an early end to the current downphase.


Daily NQ candles




Inevitably, we get called away from our screens from time to time.
An urgent phone call, something beyond the front door that
requires attention.  A few minutes or a few hours go by, and you
return full of fear and trembling at what might have happened.  A
rush of relief as you discover that during all that time, the
markets went net nowhere.  Today was one such day.  There was a
blast to the rally highs, followed by a dip to near the overnight
lows, and a bounce into the close.  With futures, catching part of
these moves is sufficient for an OK trading day, but the hours
spent in a narrow range are difficult to bear.

The NQ touched a high of 1024, closing at 1018.50, near the middle
of its day range.  The ongoing daily oscillator upphase progressed
further with no sign of a rollover.  The step rise on the daily
candles looks like a bear wedge, but that observation’s becoming
trite in the extreme, as much of this year’s rally has been built
on bear wedges, followed by partial break, and then the next leg
up in yet another wedge.  So long as price continues to advance,
the daily trend remains up.  The downside target on this bear
wedge is 1300 NQ if it plays out.


30 minute 20 day chart of the NQ




The 30 minute chart is sporting a nice bearish divergence on both
the stochastic and Macd oscillators, with the price spike failing
before the oscillators could catch up.  The rollover from a lower
high against a higher price high indicates a spikier, more fragile
price move, which coincides with what many of us observed.
Friday’s closing ramp came from a routine buy signal that looked
good for a couple of points at the outside.  The spike came very
quickly on light volume, and caught many by surprise, including
the oscillators.

Once again, however, an uptrend is an uptrend  and must be
respected.  Support at 1413 is the line to watch.  The closing
uptick left the 30 minute chart oscillators hesitating in their
downphases.  With the short cycle oscillators very flighty today,
tomorrow’s open is a coin toss, but the oscillator divergence
combined with today’s light volume advance should both bulls and
bears on guard.


Daily ES candles




The sharp daily uptrend on this most recent leg is dramatic on the
ES, with the wedge targeting 990 to the downside. The upper
trendline resistance just before 1050 coincides with today’s spike
high, but looks slightly low for the current oscillator uptrend.
Of course, a failure from here would print a bearish divergence on
the oscillators and give us a beautiful sell signal in the
rearview mirror, but it’s not useful currently.  The oscillators
want to run higher from here, but as we saw on the weekly view of
the INDU and COMPX in the weekend Index Wrap, those oscillators
are maxxed out, implying that significant further upside is
unlikely.  I would guess that if 1050 ES is going to be exceeded,
it shouldn’t be by much, but the return of real volume tomorrow
will tell the tale.


20 day 30 minute chart of the ES




We see the same bearish divergence on the 30 minute ES candles.
Trendline resistance again looks like 1050, but the bearish
oscillator divergence portends a drop coming shortly.  Note that
the uptick in the 300 minute stoch on the NQ doesn’t appear on the
ES or YM, but it’s too small to read much into, particularly given
today’s very light volume of 1.04B NYSE shares.


Daily YM candles




The strength in the YM is a sight to behold, particularly given
the weakness in GE again today.  There was an ongoing liquidation
in GE, which reached a low of 28.65 and closed at 28.83, even as
the YM and ES reached new highs.  It’s inconceivable to me that
the markets will advance without The General, but it didn’t seem
to bother most buyers today.  Again, with the light volume today
and Friday, tomorrow should bring a good dose of clarity to what
is becoming an increasingly muddy picture.


20 day 30 minute chart of the YM




We saw consistently low put to call readings today, with the SPX
volatility index, the VIX, hitting a new alltime low for its short
life and closing -.90 at 17.55.  The old VIX, the VXO, closed up
09 at 19.33, a very low reading as well.  It’s opex week, and so
anything can happen, but the markets appear blissful and oblivious
to any downside risk.  The bearish divergences we’re watching atop
a steep bear wedge deserve more than the complacency we’re seeing,
but an uptrend is an uptrend.  Bulls and bears need to be careful.
I continue to think that the risk of 1000 YM points to upside
pales beside the risk of 1000 points to the down, but we’ll trade
what we see.  See you tomorrow in the Futures Monitor.


********************
INDEX TRADER SUMMARY
********************

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_101303_1.asp


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The Option Investor Newsletter                   Monday 10-13-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: BBY, BSC, CAT, EXC, FD, UTX
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - BBY
Watch List: Eyes on Some Big Board Stocks

Updated on the site tonight:
Market Posture: Bulls Celebrate Columbus Day with Green


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*****************
STOP-LOSS UPDATES
*****************

BBY - call
Adjust from $50.25 up to $51.25

BSC - call
Adjust from $73.50 up to $75.25

CAT - call
Adjust from $71.90 up to $73.00

EXC - call
Adjust from $62.75 up to $63.25

FD - call
Adjust from $42.75 up to $43.50

UTX - call
Adjust from $78.50 up to $80.90


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

None


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**********************
PLAY OF THE DAY - CALL
**********************

Best Buy Company - BBY - cls: 54.60 chng: +1.95 stop: 51.25*new*

Company Description:
Best Buy a specialty retailer of name-brand consumer electronics,
home office equipment, entertainment software and appliances.  The
company provides a broad selection of models within each product
line in order to provide the customer with a meaningful
assortment, offering more than 5800 products, not counting
entertainment software titles.  Growing its store count by 15% in
fiscal year 2000, brought the grand total to more than 4000 in 41
states by year end.

Why we like it:
Just as we were beginning to fret that BBY might just roll over
and die, the stock rocketed sharply higher on Thursday following
the company's reaffirmation of its guidance.  The entire Retail
sector was strongly positive and that helped the bulls push to
just 25-cents from our initial $54 target.  Friday's lackluster
session really didn't have anything to offer except for a bit of
consolidation ahead of the weekend.  Next week, we'll be looking
for a breakout over $54 to confirm that our aggressive target of
$57 is achievable.  The best entries right now will come from a
pullback and rebound from the $51.50-52.00 area, although momentum
entries on a breakout over $54 should work too.  Note that our
stop is now set at $50.25 (just below the bottom of the 10/03
gap).  Since BBY doesn't report earnings again until the middle of
December, we have plenty of time to let the action play out.

Why This is our Play of the Day
Defying the odds, the broad market managed another solidly bullish
close on Monday, despite the light volume.  The Retail index
(RLX.X) was a clear winner, advancing more than 1.1% to post its
best close since the spring of 2000.  As one of the leading stocks
in the sector lately, BBY maintained its relative strength,
kicking off the week with a 3.7% gain.  With today's strong
breakout over the September highs, it appears the bulls are
setting their sights on the $57-58 area, the site of the highs
from early 2000.  New entries can be considered on a breakout over
$55 for a quick run to our $57 target or on a dip and rebound from
the vicinity of $53.  Note that we've moved our stop up to $51.25
tonight.  While that is still a bit above the 10-dma ($51.11), it
will be well below that measure of support by tomorrow's open.
Trader's buying into further strength need to be aware that BBY is
already up against its upper Bollinger band, so a steep ascent
from here has lower odds than waiting for a shallow pullback for
entry.

Suggested Options:
Shorter Term: The November 55 Call will offer short-term traders
the best return on an immediate move, as it is just at the money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the November 60 Call.  This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run.  More conservative
long-term traders will want to use the December 60 Call.

BUY CALL NOV-55 BBY-KK OI= 4275 at $2.50 SL=1.25
BUY CALL NOV-60 BBY-KL OI=  542 at $0.85 SL=0.40
BUY CALL DEC-55 BBY-LK OI= 5297 at $3.50 SL=1.75
BUY CALL DEC-60 BBY-LL OI=  853 at $1.60 SL=0.75

Annotated Chart of BBY:




Picked on October 5th at     $51.00
Change since picked:          +3.60
Earnings Date              12/17/03 (unconfirmed)
Average Daily Volume =     3.87 mln




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**********
Watch List
**********

Eyes on Some Big Board Stocks

Winnebago Industries - WGO - close: 52.95 change: +1.14

WHAT TO WATCH: Shares of WGO are powering ahead after a recent
breakout above the $50 mark, which had been resistance in
September.  Now the stock is hitting new all-time highs above
resistance at $51.50, which held it back in March and November of
2002.  What makes the recent surge notable is that volume has
been way above average the last three days in a row.  It makes
one wonder if someone knows something about WGO's upcoming
Thursday morning earnings announcement.  Estimates are for 60
cents a share.

Chart=


---

Omnicom Group - OMC - close: 76.40 change: +0.13

WHAT TO WATCH: OMC is trying very hard to cement the recent
breakout over its simple 50-dma but today's session turned in
volume that was less than anemic.  Fortunately, the MACD is
looking pretty bullish as is most of the stock's technicals.
Traders who prefer to target their entries on a dip can watch the
$74-75 region for any such action.  Momentum traders may want to
key in on the $77.50 mark and use that as a signal to evaluate
new long plays.  OMC is expected to announce earnings near Oct.
27th.

Chart=


---

General Dynamics - GD - close: 82.62 change: +1.37

WHAT TO WATCH: One of the better performers in the defense group
is GD.  The DFI defense index has been mirroring moves in shares
of GD and together they both broke back above their respective
50-dma's.  GD's MACD has turned positive again and the stock has
essentially filled the gap from mid September.  We're a little
cautious on the stock and wouldn't recommend new long positions
right here, especially with earnings expected on Wednesday
morning.  Another bounce from the $80 level might be more
palatable.

Chart=


---

Harley Davidson - HDI - close: 51.55 change: +0.94

WHAT TO WATCH: Enjoying a recent breakout above the $50 level is
HDI.  Shares recently found new support at their simple 50-dma
last month and are now shooting higher ahead of the company's
earnings report.  HDI should announce on Wednesday morning before
the opening bell.  Good news could send it to overhead resistance
near $55.

Chart=



**************
MARKET POSTURE
**************

Bulls Celebrate Columbus Day with Green

To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/mp_101303.asp


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