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Daily Newsletter, Monday, 10/20/2003

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The Option Investor Newsletter                   Monday 10-20-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Good Start to a Long Week
Futures Wrap: Return to the scene of the crime
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     10-20-2003            High     Low     Volume Advance/Decline
DJIA     9777.94 + 56.15  9777.94  9705.57 1.43 bln   1572/1227
NASDAQ   1925.14 + 12.78  1925.16  1905.39 1.53 bln   1571/1511
S&P 100   521.43 +  3.31   521.43   516.94   Totals   3143/2738
S&P 500  1044.68 +  5.36  1044.69  1036.13
RUS 2000  521.44 +  0.10   523.34   521.44
DJ TRANS 2856.79 +  9.51  2860.53  2833.97
VIX        17.04 -  1.75    18.07    17.04
VXO        18.16 -  1.03    19.69    18.02
VXN        24.78 -  4.06    26.61    24.59
Total Volume 3,255M
Total UpVol  1,929M
Total DnVol  1,257M
52wk Highs     445
52wk Lows       21
TRIN          0.79
PUT/CALL      0.62
*******************************************************************

Good Start to a Long Week
by James Brown

The heaviest week for the Q3 earnings torrent is off to a good 
start.  Among the hundreds of companies that will be announcing 
this week today's numbers from 3M, Citigroup, Lexmark and Texas 
Instruments are casting a positive glow for stocks.  Thankfully, 
investors were paying more attention to the earnings numbers than 
the disappointing economic indicators unveiled today.  The 
biggest winners were found in hardware, airlines, and 
semiconductors but the major indices all caught a second wind 
late in the session lifting them higher by the close.  

Doing their best to provide a tailwind for U.S. indices were 
positive results from foreign exchanges.  Asian exchanges were 
strongly higher.  The Hang Seng jumped 103 points to close at 
12,147.  The Japanese NIKKEI rose 123 points or 1.12% to close at 
a 16-month high of 11,161.  The rise was boosted by jump in the 
dollar against the yen thanks to comments from Treasury Secretary 
John Snow.  European exchanges were also green.  The British FTSE 
just barely added 3.5 points to close at 4347 and the German DAX 
added 1.2% to close at 3559.  Meanwhile gold futures added $2.20 
to close at $374.40/ounce.  Crude oil futures dove $1.23 to 
$30.43 a barrel after Iran hinted it may choose to leave OPEC at 
some future undisclosed date.

Monday's session was mostly sideways as major averages traded in 
a tight range before the late day rally appeared.  The positive 
earnings news seems to be soothing any bullish fears that the 
recovery may not occur instead of igniting any new rally 
momentum.  We heard some talk last week and we're hearing it 
again today that the markets may have already "priced in" the 
strong earnings expectations.  The market internals reflected the 
sideways action.  Advancers beat decliners 15 to 12 on the NYSE 
while winners just barely outnumbered losers 1571 to 1511 on the 
NASDAQ.  Up volume did out perform down volume but over all 
volume was modest.  

Chart of the DJIA:


 

Chart of the COMPX:


 


The major economic report for the day and probably the week was 
the Leading Economic Indicator index (LEI) produced by the 
private research group, The Conference Board.  The index of 
leading economic indicators fell 0.2 percent in September, a 
negative surprise to almost everyone.  Most estimates had been 
for a result of unchanged after the index rose 0.4 percent in 
August.  This was the first decline since March, which if you 
remember the nation was holding its breath for the start of the 
war in Iraq.  The markets chose to ignore the negative surprise 
probably because the general trend is still bullish.  Ken 
Goldstein, an economist with the Conference Board, suggested that 
we should only worry if the LEI continues to decline in October.  
For the full statement
http://www.conference-board.org/economics/press.cfm?press_ID=2249

Have you ever wondered what it would be like to have everyone 
analyzing your every word?  Obviously President Bush and Alan 
Greenspan fall into this club but U.S. Treasury Secretary John 
Snow seems to be making a lot of headlines too.  Today Snow's 
comments rippled across the financial markets again after the 
London-based Times newspaper published an interview with the 
secretary.  Sending the dollar to its best one-day gain in months 
against the yen were Snow's comments that the recent G7 financial 
summit's agreement on flexible currencies was not a U.S. plan to 
weaken the dollar.  As noted above the Japanese NIKKEI average 
enjoyed a strong session on the dollar's strength.  Mr. Snow also 
remarked on his concern if U.S. interest rates did not begin to 
rise soon.  Many economists believe rising interest rates are 
indicative of a stronger economy.  Snow may get his wish pretty 
soon.  If you look at the chart below you'll notice that the 
yield on the 10-year note looks ready to breakout to a new 
relative high above that multi-year trendline.

Chart of the 10-year bond yield:


 

One of the lead stories today was the Q3 earnings report from Dow 
component 3M (MMM).  Investors doing their homework might be 
picking up some mixed messages.  Consensus estimates were for 79 
cents a share.  MMM turned in 83 cents compared to 69 cents a 
year ago.  According to the company overall sales reached an all-
time high for the third quarter in a row.  Furthermore the 
company raised their estimates for the fourth quarter to a range 
of 73 to 75 cents, compared with current estimates of 73 cents.  
MMM also raised their full year estimates to 3.05-3.07, above 
consensus of $3.01.  The company attributed currency rates for a 
3.9 percent gain in Q3 sales (Thank you, Mr. Snow).  It certainly 
sounds like good news and the stock was the third biggest gainer 
in the DJIA behind Hewlett Packard (HPQ) and AT&T (T).  However, 
it looks like everyone is choosing to ignore comments from MMM's 
own CFO who said the company "remains very cautious" for 2004 
because they still aren't seeing much of a recovery in 
manufacturing.  Hmm....that doesn't sound very bullish does it?  
It will be interested to see if any of the Wall Street analysts 
choose to follow up on this comment.

Markets were also interested to hear from financial services 
behemoth, Citigroup (C).  Citigroup announced earnings this 
morning, which hit a new record.  Q3 results beat estimates by a 
nickel with 90 cents a share and up 20 percent from a year ago.  
Unfortunately, analysts were disappointed with C's relatively 
flat revenue numbers.  The stock lost ground but closed up off 
its lows, -26 cents to $48.12.

Lending strength to the hardware sector was a very strong 
earnings report from printer manufacturer Lexmark Intl (LXK).  
LXK beat estimates by a dime with 79 cents a share.  The stock 
shot higher with a 10 percent gain to $74.00 with a rosy outlook 
for the fourth quarter.  LXK now expects Q4 earnings to be in the 
85 to 95 cent range compared to analysts' estimates of just 82 
cents.  

Announcing after the close tonight and potentially driving market 
direction was the earnings report from Texas Instruments (TXN).  
The chipmaker reported very strong results of 25 cents a share, 
beating estimates by 3 cents and more than doubling last year's 
result of 11 cents.  More importantly revenues were up 13 percent 
to $2.53 billion compared to estimates for 2.4 billion.  The 
world's largest mobile-phone chipmaker said gross margins jumped 
by 3.2 percent to 40.7 percent and overall orders rose 15 percent 
with chips orders growing by 21 percent.  The stock was up 7 
percent in after hours trading to $27.45 and might be able to 
lead the SOX index to a new high tomorrow.  A strong SOX is 
exactly the kind of push the NASDAQ needs to reach the 2000 mark.

Tomorrow the markets will trade solely on earnings news without 
any economic reports on the calendar.  The late afternoon bounce 
coupled with the TXN report above certainly paints a bullish 
picture for Tuesday.  Keep in mind that tomorrow morning is 
crowded with more earning reports.  Let's hope none of them 
implode with enough force to derail what could be a nice rally 
tomorrow.  Just a few of the dozen to look for are Dow component 
SBC who announces before the opening bell.  Later look for Amgen 
(AMGN) and Amazon.com (AMZN).   


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

Return to the scene of the crime
Jonathan Levinson

Equities retraced the bulk of Friday's losses in a move that 
kicked off in the last hour of trading, after the bond market 
closed.  Equities, treasuries, gold and the dollar advanced.

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.

10 minute chart of the US Dollar Index




The US Dollar Index added slightly to Friday's closing price, but 
as the above chart depicts, it did so most interestingly.  92.70 
held as resistance on two separate tests, notably at the top of 
Sunday night's vertical ramp job.  Rising support appears now in 
the 92.40 area.  Despite strength in the dollar, the CRB advanced 
15 cents, led by strength in coffee, platinum and wheat.  Gold and 
silver gained as well.

Daily chart of December gold


 

December gold closed higher by 1.40 at 373.60, holding above the 
370 support level.  The daily vacillation of the daily chart 
oscillators has them now pointed tentatively higher, but a dip 
below 370 would reverse that at this point.  Despite this mid-term 
cyclical uncertainty, I find the stability above 365 to be 
encouraging, and if holds, bulls will be able to celebrate a weak 
downphase that will have set a higher low.  Short term, however, 
the picture is variable and the current narrow range remains a 
dangerous level for directional trades.


Daily chart of the ten year note yield


 

Treasuries rose today, with the ten year note yield (TNX) falling 
below the rising trendline that has supported the bull wedge 
breakout since it began at the end of September.  The 10-day 
stochastic printed a bearish kiss from overbought territory, and 
the MACD appears maxxed out, or close to it.  Bond bulls may be 
looking at the reversal point of the recent selloff in bonds, and 
this despite John Snow's comments to the contrary.  While the Fed 
added a modest net surplus of 1.25B today via its open market 
operations, this does not account for the size of the dip in the 
TNX today.  Another negative day for the TNX tomorrow could start 
the ball rolling. 


Daily NQ candles


 

Equities did not fall apart today, which is a very significant 
statement given the outlook from last Friday and Sunday evening.  
The NQ bounced from a low of 1389, right on Fibonacci support, and 
regained the 1400 level, closing below heavy resistance at 1415-20 
with an intraday high of 1413.  The move repaired none of Friday's 
technical damage to the NQ, but it did not exacerbate it either.  
The daily chart oscillators remain in rollover territory from 
overbought, and unless the bulls aim to break through the wall at 
1430, today only ran the clock.


30 minute 20 day chart of the NQ


 

We left off on Friday with a deeply oversold set of 30 minute 
chart oscillators, and today's buying relieved that.  The 300 
minute stochastic is back to overbought territory, with NQ back 
underneath 1415-20 resistance.  If the break below that confluence 
level was significant, as I believe it was, then today's bounce 
constitutes a retest of that area from below, a return to the 
scene of the crime bounce.  This is textbook price action, and 
while the oscillators are not yet even hinting at sell signals, 
they have the daily cycle downphase with which to contend.  Bulls 
are about to be put to the test again.  


Daily ES candles


 

The ES bounced from its equivalent Fibonacci support at 1034, 
closing at its high of the day at 1045.50, just below significant 
resistance at 1047-50.  As on the NQ, this bounce accomplished 
nothing except to run a slew of stops placed above 1042, and to 
relieve the extremely oversold shorter cycle and intraday 
oscillators.  The real test begins at 1047.


20 day 30 minute chart of the ES


 

The ES bounced more meaningfully than the NQ, insofar as it 
regained the rough head and shoulders neckline.  The oscillators 
show no sign of topping yet, but the 300 minute stochastic is 
approaching the upper reaches of its usual range.  As can be seen 
on these settings, the 300 minute stoch rarely trends at the top, 
and I'd guess that the top of this move should come at 1050.  If 
so, we can lower the neckline to 1034, and set a price objective 
of 1023 on a larger head and shoulders pattern, with this bounce 
to constitute the right shoulder.  Tomorrow will tell the tale.


150-tick ES


 

The Keltner bands on and the nested Bollinger bands (faint but 
visible in orange) have been working well, in that a combined K- 
and 
B-band violation tends to signal a reversal on the 150-tick ES 
chart.  If it works in this case, 1047 should be the top of the 
current bounce, and with the short cycle oscillators buried in 
overbought, we could see a run down to the 1034-1038 area on the 
pullback.  Rolling daily cycle oscillators should keep a lid on 
the 30 minute chart upphase.  Upside from here should be limited, 
and would be based entirely on the 30 minute upphase-  if it blows 
through 1050, then something else is at work and we'll have to 
reevaluate from there.


Daily YM candles


 

Same picture but more strength evident in the YM, with most of 
Friday's losses reversed and the 10 days stochastic sell signal 
weakened on today's gains.  Nonetheless, YM is set up for the same 
potential lower high and h&s right shoulder on the 30 minute chart 
below.


20 day 30 minute chart of the YM


 

For tomorrow, we'll be watching for a continuation of today's 
bullish move in treasuries and equities.  Any failure would be 
particularly bearish for equities following last week's failure hold 
Wednesday's 52 week highs.  Caution (and active stops) remain key.  
While it still looks safe for bears, we've seen repeated short 
covering rallies with many participants trying to pick the top.  
See
you at the bell!


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_102003_1.asp


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The Option Investor Newsletter                   Monday 10-20-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: MATK
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - DNA
Watch List: Monday's a Mixed Bag

Updated on the site tonight:
Market Posture: Late Day Rally


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

MATK - put
Adjust from $51.32 down to $49.25


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

None


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

None


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*********************
PLAY OF THE DAY - PUT
*********************

Genentech Inc - DNA - close: 77.71 change: -1.37 stop: 82.30

Company Description:
Genentech is a leading biotechnology company that discovers,
develops, manufactures, and commercializes biotherapeutics for
significant unmet medical needs. Sixteen of the currently
approved biotechnology products originated from or are based on
Genentech science. Genentech manufactures and commercializes 11
biotechnology products in the United States. The company has
headquarters in South San Francisco, California, and is traded on
the New York Stock Exchange under the symbol DNA.
(source: company press release)

Why we like it:
Right off the bat let us state this is a rather gutsy play.  DNA
is a perfect example of why you trade with stop losses whether
you're trading stocks or options and especially any time you're
trading drug or biotech stocks.  A quick look at the chart for
DNA and you'll notice the booster-rocket trajectory from mid-May.
It was a very painful day for the bears and it hasn't ended.  It
has been a very good six months for DNA.  Last May they announced
very positive results for their colorectal cancer treatment
Avastin.  Many analysts believe it will be approved by the FDA in
2004 and sales could reach $1.5 to $2 billion.  On top of the
Avastin news, DNA has also benefited from a successful Xolair
launch and an FDA approval for their Raptiva treatment.  Earnings
were on October 8th and DNA beat estimates by 2 cents with 27
cents/share.

With all this good news why are we trying to "short" it?  Well
nothing goes up forever and DNA is hinting at a potential
breakdown.  We're going to protect ourselves by ONLY opening
bearish plays if DNA trades through our TRIGGER at $77.50.
Should that occur then a retracement to the $70 level could be
fast with a potential for weakness towards the $65 area.  A move
under $77.00 would produce a quadruple bottom breakdown on its
P&F chart.  If we are triggered we'll start the play with a stop
at 82.30.  More conservative traders might be able to use a stop
closer to $81.00.  This is high risk and not suggested for all
traders.

Why This is our Play of the Day
With our entry trigger set at $77.50, DNA didn't show any 
inclination to challenge that level during the first hour of trade 
on Monday.  But that all changed around 10:45am ET, as the stock 
broke below last Friday's lows and plunged sharply lower until 
reaching its intraday low of $76.71.  Not only did that activate 
our trigger on the play, but it also generated a PnF Sell signal, 
its first since March.  DNA is up sharply over the past several 
months, so that leaves lots of profits to be harvested.  For now, 
we'll just focus on the immediate PnF price target of $71, but 
keep in mind that each dollar lower in price before a 3-box 
reversal, drops that target by $2.  The stock did manage a decent 
rebound off its intraday lows to close just over the $77.50 level, 
but resistance should now be stiff in the $78.50-79.00 area, with 
even stronger resistance in the $80.00-80.50 area.  Target new 
entries on a rollover from either of those resistance zones, while 
maintaining stops at $82.30.  Momentum entries can be considered 
on a break below $76.50, looking for a drop into the $70-71 area.

Suggested Options:
We like the November 80's and 75s for short-term trades and 
December or January's for longer-term trades.

BUY PUT NOV 75 DNA-WO OI=1013 at $1.90 SL=1.00
BUY PUT NOV 80 DNA-WP OI=1735 at $4.20 SL=2.50
BUY PUT DEC 75 DNA-XO OI=1708 at $2.90 SL=1.50
BUY PUT DEC 80 DNA-XP OI=3524 at $5.80 SL=3.75

Annotated Chart of DNA:


 

Picked on October 20th at $77.50
Change since picked:       +0.21
Earnings Date           10/08/03 (confirmed)
Average Daily Volume:   2.57 mln




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

Monday's a Mixed Bag.

Wellpoint Health Networks - WLP - close: 83.32 change: +0.83

WHAT TO WATCH: The breakout continues for shares of WLP.  The 
stock has broken above resistance in the $82.00 region.  Short-
term bullish traders may want to watch it for a ramp up into 
earnings on October 27th.  Estimates are for $1.45 a share.  
Watch out for resistance in the $86-87 level.

Chart=


---

Yahoo! Inc - YHOO - close: 42.37 change: +0.13

WHAT TO WATCH: Yahoo has already reported its Q3 earnings results 
and the numbers were good.  However, tomorrow Amazon.com (AMZN) 
reports and depending on what AMZN has to say YHOO could react.  
We realize that may not make sense considering their different 
business models but stocks certainly react to big news from their 
sector-mates.  In the absence of any news we'd consider bearish 
plays under $40 (maybe $41) and bullish plays with a VERY tight 
stop over $43.

Chart=


---

Alberto Culver Co - ACV - close: 61.74 change: -0.18

WHAT TO WATCH: Wow! Talk about your rallies.  Shares of ACV have 
quite the trend.  We're going to be curious to see how this trend 
holds up after the company announces earnings on Thursday.  
Estimates are for 73 cents a share.

Chart=


---

Sony Corp - SNE - close: 37.85 change: +0.45

WHAT TO WATCH: Shares of SNE have been climbing a wide ascending 
channel since its April lows.  The jump in the dollar today does 
not hurt (making SNE's products more affordable) nor does a 
rising NIKKEI average.  There is some resistance near $38 and 
potentially again at $40 but the rising trend looks strong.  
Watch out for earnings on Thursday!

Chart=



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

Late Day Rally

To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/mp_102003.asp


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card server or you may simply send an email to

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