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Daily Newsletter, Thursday, 11/13/2003

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The Option Investor Newsletter               Thursday 11-13-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Easy as Dell, Oops!
Futures Markets: Supercalifragilisticexpialidocious
Index Trader Wrap: Markets were unmoved by the close
Market Sentiment: Holding Gains


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      11-13-2003           High     Low     Volume Advance/Decline
DJIA     9837.94 - 10.90  9852.90  9792.01 1.63 bln   1725/1388
NASDAQ   1967.35 -  5.80  1970.40  1956.41 1.80 bln   1515/1571
S&P 100   522.99 -  1.20   524.19   520.86   Totals   3240/2959
S&P 500  1058.41 -  0.12  1059.62  1052.96
W5000   10329.90 +  2.90 10341.08 10281.26
RUS 2000  541.20 +  0.54   542.39   537.81
DJ TRANS 2948.45 -  4.80  2954.12  2935.58
VIX        16.45 -  0.30    17.13    16.45
VXO VIX-O  16.84 -  0.15    17.67    16.62
VXN        25.42 -  0.13    26.01    25.24
Total Volume 3,700M
Total UpVol  1,701M
Total DnVol  1,952M
52wk Highs  649
52wk Lows    20
TRIN       1.26
NAZTRIN    1.27
PUT/CALL   0.76
************************************************************

Easy as Dell, Oops!

At 3:20 the markets were rallying in advance of Dell's earnings
due out after the close and everyone was setting up their end
of day strategy. Suddenly the news was accidentally released
and the market went crazy. Stops were run to the upside and
the downside as everyone scrambled to enter/exit/protect trades.
After about 10 min the news was completely disseminated and the
urgency was over. That bout of volatility was the highlight of
the day.

Dow Chart


Nasdaq Chart



The morning started with some bullishness after the Jobless
Claims posted another week well away from the 400K level. The
claims for this week were only 366,000 and the claims from
last week were only revised up the normal 5000 to 353,000. It
appears the big drop from last week is going to stick and the
pace of layoffs is slowing. Continuing claims rose slightly
but the trend is still down. This is a major change in the
employment picture but we still need to see a consistent drop
below 350,000 to indicate a stabilizing labor market.

Import prices rose only +0.1% and less than expected. Export
prices rose +0.3% due to higher agricultural prices. Beef and
grains are soaring on the world market due to Canada's mad
cow problem and droughts in crop belts around the world. The
International Trade numbers showed a greater than expected
deficit of -$41.3 billion. Were it not for a large jump in
exports the numbers would have been much worse. We imported
$127 billion and exported $86 billion. Each was an increase
of about +3.7%. This would indicate the global economy is
improving although slowly.

A more negative tone was set by the Mortgage Application
Survey for last week, which at 626.0 was at a 52-week low.
Purchase applications fell -7.1% and refi applications fell
-10.1%. This was a substantial drop and shows what we have
been afraid of for months. The initial rise in rates caused
a flurry of activity in October as those laggards who had
been putting off taking the plunge were pushed into action.
Now that activity is waning as the rates appear to be ready
to start that long climb. Two Fed heads, Moskow and Poole,
said today that they do not see any rate hike soon but the
perception by the consumer is higher rates ahead.

The biggest negative for the morning was an earnings miss
by Dow component Wal-Mart. The king of the category killers
said increased competition, apparel write downs and too big
a focus on sale items cut their margins and lowered profits.
Considering the term competition is normally used against
WMT with the adjective unfair in front of it the turn about
is amazing. Also, WMT said that customers were focusing on
the sale items and not the broader range of merchandise.
This confirms the adage that you can sell anything if you
lower the price enough. Unfortunately you cannot make a
fat profit on the transaction.

Not only did the normally bulletproof WMT miss earnings but
they said consumers were remaining cautious. This was the
major hiccup. If WMT consumers, the most price conscious
shoppers in the worlds most competitive store, are holding
back on purchases because they are cautious then the entire
consumer driven recovery is in question. If these consumers
are hoarding cash then this is the broadest indicator of
sentiment available. WMT also said inventory levels were
higher than normal but manageable. This was another negative
to analysts. If WMT thinks inventory levels are too high
going into the holiday shopping season then the outlook for
that season may be too high. WMT lost -2.44 (-4.2%) on the
news and wiped out all the economic bullishness before the
open.

Traders were unable to recover from the initial weakness
until late in the afternoon. The Nasdaq failed to capitalize
on the AMAT earnings after the close on Wednesday. They beat
the street by a penny and said order growth for the 4Q was
up +20%. AMAT dropped -70 cents and the SOX lost -5.32. The
culprit was the -16% drop in sales, a falling gross margin
and insider selling. While AMAT was pounding the drum on
the future traders were looking at the past and what could
be seen by some as an expensive stock price. In reality it
was just a sell the news event once again. The SOX had just
hit 531 and very near a new 52-week high and had plenty of
expectations already priced in. We also saw on Wednesday
that the Gartner Group had predicted +20% chip growth in
2004 and $210 billion in revenue for the chip sector. With
this bullish data pushing the chip sector up the negatives
in the AMAT report produced some disappointment.

This same scenario could be seen today when Dell announced
earnings that were inline with estimates. Sales in all
sectors were up strongly with their printer business up
+80%, servers +30% and so on. The stock fell in after hours
after Dell said that although revenue would be up +25% in
the 4Q earnings would not rise as much. The CFO continued
to say that sales to consumers were good but that business
spending had only stabilized. This has been the complaint
from every major tech stock that business buying has not
increase materially but has only ceased dropping and has
stabilized. Nasdaq futures were down -5.50 in after hours
after the Dell conference call.

Tomorrow we have a Greenspan speech in Washington and all
eyes will be glued to his every word. Today we heard from
Poole that he saw rates remaining at the current level
beyond March. This was an effort to head off the rising
bet that the Fed would hike at the March meeting if not
before, well before. Moskow also chimed in with a "Fed
can remain accommodative" for some time comment. Of course
it was quickly pointed out that the Fed could see itself
as accommodative even after several rate hikes. The current
rate is several points below the historical average. There
was no shortage of buyers for the $16 billion in 5-yr notes
on Wednesday and the $17 billion in 10-yr notes today. There
was also significant buying in bonds and the 10-yr note
yield fell -1.41 or -3.19% to 42.71 today.

92% of the S&P companies have announced earnings for the
3Q and the results are very strong with earnings growth
at +20.7% from the 3Q-2002. This was the second strongest
quarter in recent memory with Q2-2000 the strongest at
+21.6% growth. The 4Q earnings are also expected to be strong
but Chuck Hill at First Call said the comparisons stop there.
The growth for Q1-2004 is up for grabs considering the much
stronger 2003 comparisons. The Q3 growth was funded by the
tax cuts, mortgage refi boom and the low interest rates.
Q1 will see another boost from the tax checks but the
other two factors have slipped into the historical mode.

The mutual fund scandal saw its first settlement today with
Putman settling with the SEC and agreeing to make some major
changes in the way it does business and by paying some yet
to be determined penalty. MMC, the parent of Putman, saw a
sharp spike in price on the news. Unfortunately it was short
lived because the biggest threat is the state probes headed
by NY AG Spitzer. He is still on the attack and issuing new
probes into still more funds and is planning on criminal
charges.

GE, INTC and MSFT saw further weakness today and it appeared
the funds were still liquidating positions. IBM was the only
major big cap tech to keep its gains from yesterday when IBM
and GE helped push the indexes higher by making bullish
comments at the IBM conference. GE traded 25 million shares,
which is about 25% more than the average daily volume. The
volume in the market was not heavy with only 3.7 billion
across all markets.

Despite the lighter than average volume and the decline in
the averages the internals were still strong. New 52-week
highs were 696 compared to 590 on Wednesday when the indexes
were strongly bullish. Advancing/declining volume was even.
The Dow held on to the majority of its gains from Wednesday
and is poised to move higher. It held above support at 9800
and showed very little profit taking. Considering the strong
gains on Wednesday this was a win for the bulls. If you took
out the WMT loss the Dow would have finished in positive
territory around 9850. Tomorrow the bullish trend could
easily return. The Nasdaq tried three times to rally back
to positive territory and finished only 34 points from N2K.
It may have been a negative day for the indexes but it was
a positive day for the markets. I told you on Tuesday to
watch the internals for the real trend and we saw 5:1
advancing to declining volume on Wednesday. Very strong.
Continue to watch the internals to see if any weakness on
Friday is just a dip, like today, or the real thing.

Friday we have several important economic events. We have
the PPI, Retail Sales, Industrial Production and Michigan
Sentiment. Considering how positive the economics for the
last couple weeks have been the bar may be very high for
these reports. The consensus estimates are for little gain
in the surveys but the whisper numbers could be much higher.
Unless there is a real disaster I predict they will be
ignored and the bulls will continue to buy the dips.

That is the current trend. Buy the dips not buy the tops.
Each time we near the prior highs the bids evaporate and
we go back down again. Despite the strong internals the
market still feels heavy. This is giving the bears hope
and helping to push it higher every time they are forced
to cover their shorts. One thing I noticed today was a
rotation into drug stocks. This could be a leading indicator
of some tech weakness ahead. Drugs have literally been
killed over the last year while techs have been climbing.
When institutional investors decide techs are overblown
they tend to rotate into drug stocks for safety until the
techs correct. This was the second day that drugs have
rallied and PFE, MRK, LLY, etc all rallied strongly. PFE
jumped +1.05 on 2.5 times its normal volume. PFE was helped
by some news that Lipitor slowed the buildup of plaque in
arteries. This is the kind of news that is typically used
as an excuse for the rotation but a quick look at a few
drug company charts shows the uptick started several days
ago. Watch the drugs for strength, the techs for weakness
and the internals for direction.

There was also a warning that was picked up by only a few
news outlets after the close. According to the reports
someone named Al-Hijazi and claiming to be a commander
close to Osama is warning that a huge attack against the
U.S. is going to kill as many as 100,000 and will be
launched during Ramadan. A different report said the attack
would be before the Solar eclipse on November 23rd. While
I seriously doubt this will come to pass it may create a
cloud over any Friday gains. Investors may not want to be
long over the weekend.

As long as the Dow continues to hover just below 9900 we
are always in striking distance of Dow 10,000 and the
unofficial target for some profit taking. Nasdaq 2000 is
also close and could easily be touched first. One of the
reasons we may be having trouble moving higher is the
nearness to those levels. If the entire professional
trading community is planning on selling there then we
could be seeing front running of those levels. The bulls
are buying the dips but not the tops and that leaves us
stuck in the range until the deadlock is broken. If you
need proof that the sentiment is still off the scale
bullish you need only look at the VXO which closed at
16.84 and another five year low today.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


***************
FUTURES MARKETS
***************

Supercalifragilisticexpialidocious
Jonathan Levinson

That, evidently, is how the market feels, with the OEX volatility
index hitting a new multiyear low at 16.62 after Farmer in the...
reported its earnings inline during the cash session.  Bonds
rallied, gold and silver held their gains, and the US Dollar
Index got dropped like a bad habit, again.

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 Dollar carnage continued, with a fairly steady continuation
to yesterday's selloff taking the US Dollar Index to a new low
for the move to just above 91.50.  The CRB hit new multiyear
highs, closing at its high of the day, while gold, the HUI and
XAU corrected a small part of yesterday's considerable gains.


Daily chart of December gold


December gold and silver dropped a mere 30 cents, silver .036 or
67%, with the yellow metal closing at 394.70.  Again, the
strength is confirmed by the run in the CRB, which added 1.87 to
close at its day high of 255, led by cocoa, heating oil, coffee
and crude oil futures.  Dec gold is back on a buy signal, but the
oscillators at current levels are at lower highs, which would set
up a massive bearish divergence if the price does not hold
current levels long enough to let the oscillators catch up.  This
is an esoteric point of caution here, but I continue to feel, as
I did 10 points below, that this remains a dangerous area for new
longs.  Higher highs are clearly possible, but, as with the NQ,
ES and YM, gold feels closer to a nearterm top than to a bottom.
For those who bought near the lows this year or last, that's of
minor concern.


Daily chart of the ten year note yield


The ten year yield got soaked today as buyers rushed into bonds,
with the TNX dropping 14.1 bps to land with a lifeless "thud" on
the lower pennant trendline.  As reported in the Futures Monitor,
the ten year treasury auction generated a 1.9 bid-to-cover ratio.
I don't see any of this as reflecting well on the lack of selling
in equities.  Through all this, the VXO hit a new multiyear low.
Either the different markets are more bifurcated than usual, or
it's Fed or other such intervention money buying everything
together and sinking the dollar in the process.


Daily NQ candles


The NQ dropped 2.50 today, the ES added .25 and the YM lost 9
points.  But volatility collapsed, with the VXO setting a new
multiyear low at 16.62, closing at 16.84.  Volatility collapsed
when the indices reversed midway into a synchronous downphase
across the intraday, daily and weekly oscillators.  This was a
setup for which we've been waiting days and possibly weeks, and
the buying was absolutely inexplicable.  Perhaps the lack of a
downside surprise from Farmer-in-the... got leaked, prompting the
early release of its report.  Who knows.  Either way, the sell
signals and bearish divergences remain intact on the daily chart,
with 1460 and 1425 the key range levels to watch.  Nothing has
changed since yesterday in this timeframe, but an up-day tomorrow
could give us a fresh buy signal on the daily.  The bulls appear
to be as complacent and oblivious as I have ever seen them.


30 minute 20 day chart of the NQ


In yet another marvel of the "What me worry?" rally since March,
a picture-perfect setup aborted early, with 1432 fibonacci
support providing sufficient support from which to launch a
bounce, culminating in a spike high on the early earnings from...
you know.  The bounce retraced but did not reverse, and that was
enough to kick off a fresh upphase on the 30 minute cycle
oscillators.  A revising to 1460 or beyond could occur from this
setup, reversing the daily downphase in the process and
potentially causing that longer, key cycle oscillator to begin
trending in overbought.  As unlikely as that appears,
particularly given the bargain-basement-markdown levels on the
VXO, truly anything is possible.  First sign of trouble will be a
break above 1450, and if 1460 falls, I expect a short covering/
momentum breakout rally.

Daily ES candles


The ES gave us a bullish candle on its .25 point gain.  As with
the NQ, the daily remains on a sell signal and in a so-far brief,
sideways downphase.  The upper wedge resistance at 1062 is key in
preserving this downphase intact, and a break above could confuse
the picture considerably.


20 day 30 minute chart of the ES


We see the same early upphase kicked off on the 30 minute ES.
1066 is the key, last-ditch resistance on this timeframe.  I
don't see the ES getting far from here, but nothing would
surprise me at this point.  The upphase here appears to be news-
related, a fast-forward of what would normally have taken place
after the bell.  But if it doesn't abort at or near current
levels, certainly before 1066, then it will be back to the
drawing board.  The same setup we had last night will be with us
at that level, when the 30 minute cycle oscillator once again
tops, with the daily and weekly already on sell signals.

150-tick ES


The surprise ramp kicked off at 2:30PM, and culminated in the
DELL engulfing printed at 3:20ish.

Daily YM candles


Same setup on the YM.  Last Friday's highs should not be exceeded
under my current analysis.


20 day 30 minute chart of the YM


There's little to say about a session like we had today.  The VXO
is at levels that utterly indict the current pricing of equities
and equity options, and place the risk for bulls somewhere north
of the stratosphere.  The only scenario under which such would
not be the case would be if the bear market were over and a new
bull market were upon us, which I do not believe.  I note that
the VXO is lower than it was at the March 2000 peak.  Traders
should continue to trade what they see, and not hesitate to get
stopped out of positions that go against them, in either
direction and for whatever reason.  At the same time, moves such
as occurred with DELL's release are unforeseeable, and my heart
goes out to traders stopped out on what was a one or two candle
move.  The message here:  Trade Safe, whatever your bias or
position, as there's great risk in this low-volatility
environment.


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

Markets were unmoved by the close

A negative reaction to retailing giant Wal-Mart's (NYSE:WMT)
$55.52 -4.2% quarterly earnings set a negative tone in the early
part of today's session, and while traders and investors observed
a larger than forecasted September trade balance and weekly
jobless claims of 366,000 as not representing overly bullish
economic reports, the major indices finished relatively
unchanged, as if it was worth the wait to see what tomorrow's
economic data says about the past, but also the future.

The one economic report due out tomorrow that I want to quickly
touch on is the retail sales data for October.

Something a trader may want to think about ahead of those numbers
is that it has now been widely reported that recent weather
patterns have been abnormally warm, and in the retail industry,
that isn't good for getting shoppers to the stores and malls.
Cooler weather is a retailer's best friend as consumers coming
down with a case of cabin fever of take a trip to the local
department store or shopping mall to stretch their legs, maybe
their pocket books, to see what's on sale.

It would be my thinking that regardless of what economists are
estimating, most investors/traders are going to look at the
retail numbers and give them a little slack as if to think the
ex-auto's for October aren't necessarily going to be a good read
on the consumer, but greater focus will probably be given to the
retail sales number that include auto sales, which in my
estimates would be a larger ticket item, where a consumer doesn't
go buy an automobile just because they have a case of cabin
fever.

Current forecasts for tomorrow's retail sales have economists'
looking for October total retail sales to be down -0.2%, while
forecasts for October retail sales (ex-auto) are forecasted to
have risen +0.2%.  So.... my thinking is that the market may put
greater focus on the autos, and if my math is correct, based on
economists' forecast, the "inline" number would be for auto sales
to have declined 0.4% in October.

Also due out tomorrow, is October PPI (forecasted +0.2%) and core
PPI (forecasted +0.1%), which is hardly inflationary.  Industrial
production for October (forecasted +0.4%) and capacity
utilization (forecasted 75%) are also due out before the opening
bell.

During market hours, at 09:45 AM EST, we'll get a look at the
University of Michigan's November Sentiment, where economists'
look for the sentiment survey to improve to 91.3 from October's
89.6 reading.

Here's a quick look at the pivot matrix for tomorrow, and I am very
hesitant to try and call a market direction right now, as I sense a
great deal of pressure building, where I can only suggest
support at the WEEKLY S1s and resistance at the WEEKLY R1s.

After viewing some of today's post market close comments in the
futures monitor at OptionInvestor.com, I get the impression that
bears hold a high degree of confidence that the markets are at
their top.  As many of you know, I dislike trying to call tops
when we're at highs were there is little overhead supply to keep
things in check.

While the major indices look very overbought, I dare say they
look very strong.  When bears are saying "bring it on!" and
"bulls have until tomorrow" to prove their worth after proving
they can push the indices to new 52-week highs, I must say I
sense a GREAT deal of bearish complacency.

Pivot Analysis Matrix




Resistance does look formidable at the WEEKLY R1s, and while
there was bearish chatter that the U.S. Government can't possibly
be being truthful with their economic reports, bulls have yet to
cave in to such talk.

I've highlighted in PINK, those levels I deem rather IMPORTANT
support and resistance levels.  While these levels may seem
"broad" a quick percentage calculation of the SPX's MONTHLY Pivot
and MONTHLY R1, where neither level has been traded, is a modest
3.6% range in a grander scope of things.

Equity sectors finished today's session mixed, with healthcare,
drugs, oil service and biotechs all posting gains greater than
1.5%.

Only the retailers as depicted by the S&P Retail Index (RLX.X)
382.83 -1.18% and the Semiconductor Index (SOX.X) 525.70 -1%
posted losses of 1% or more.  With a sector bellwether and
heavyweight like Wal-Mart (WMT) falling 4.2%, the retailing
sector held rather firm.

NYSE Composite Index ($NYA.X) - Monthly Intervals




The NYSE Composite ($NYA.X) closed above the 6,000 level today
and now approached the 6,135 level, which would be a 61.8%
retracement of decline from an all-time high.  A 50% to 61.8%
retracement often finds formidable resistance, where a pullback
is expected for gains to be digested.  Solid support should be
found back near 5,500.  Bullish traders will exercise caution in
their accounts here.

While I have my bearish thoughts at these more lofty bullish risk
levels, I'm not confident enough to shout, "bring it on."  Not
yet.

S&P 500 Index Chart - Daily Intervals




I was more willing to protect modest gains in a bullish trade
today, the see them fall to the wayside.  I would have rather
been LONG into today's close than short.  While bears talk of a
top, its difficult to say what could happen should they
capitulate.

Dow Industrials Chart - Daily Interval




I still would view the INDU bullish above 9,700, with my most
bullish target being 10,000 at this point.  Things that could get
me more bullish would be capacity utilization above 77%.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals




I tried to give the QQQ a bullish chance today, but raised a
protective stop too tight.  Still, I'm not overly upset with even
a modest profit.  Then tried to turn DAY TRADE bearish, but was
taken out for small loss.  I did NOT want to hold a bearish trade
overnight.  While the recent reversal back lower to "bear
confirmed" at these high levels of bullish % have me VERY
cautious from the bullish side in the QQQ, I know all too well
the HUGE short position on the QQQ, and with limited overhead
supply to keep things remotely in check if bears cave in and
capitulate on an upward move, I didn't want to risk a gap higher
open with the bulk of tomorrow's economic data due out before the
bell.

Trade small positions would be my most worthy advice.

Jeff Bailey


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****************
MARKET SENTIMENT
****************

Holding Gains
- J. Brown

The major averages may have closed in the red today but losses
were mild and after yesterday's big rally investors shouldn't
complain.  Considering that Wal-Mart, the biggest retailer on the
planet (and Dow component), missed earnings by a penny bulls
should count themselves lucky that the DJIA only dropped 10
points.  The market's strength today really was the big story.
WMT said that shoppers continued to be cautious which is not what
investors or Wall Street wants to hear.  For the last few weeks
we've heard nothing but how strong this coming holiday shopping
season was likely to be.  Now WMT is casting a big shadow over
those expectations.

This morning's economic reports and initial jobless claims were a
non-event.  Jobless claims came in low as expected and marked
another week under the pivotal 400,000 level.  Tomorrow could be
a big day with the PPI, retail sales (likely to be anti-
climatic), industrial production and utilization numbers and the
Michigan Sentiment report.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High:  9903
52-week Low :  7197
Current     :  9837

Moving Averages:
(Simple)

 10-dma: 9816
 50-dma: 9634
200-dma: 8899



S&P 500 ($SPX)

52-week High: 1062
52-week Low :  768
Current     : 1058

Moving Averages:
(Simple)

 10-dma: 1053
 50-dma: 1034
200-dma:  955



Nasdaq-100 ($NDX)

52-week High: 1453
52-week Low :  795
Current     : 1439

Moving Averages:
(Simple)

 10-dma: 1430
 50-dma: 1388
200-dma: 1207



-----------------------------------------------------------------

Wow! We have a new closing low for VXO (old VIX) at 16.84.
The VIX hasn't been this low in years.  Of course
there is nothing to stop it from dropping lower and that
may be the case as the markets hover near one-year highs.
This remains a growing storm cloud for the bulls.

CBOE Market Volatility Index (VIX) = 16.47 -0.28
CBOE Mkt Volatility old VIX  (VXO) = 16.84 -0.15
Nasdaq Volatility Index (VXN)      = 25.45 -0.10


-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.78        721,852       560,283
Equity Only    0.63        609,893       383,694
OEX            0.73         25,410        18,445
QQQ            1.34         28,087        37,747


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          73.4    + 0     Bull Confirmed
NASDAQ-100    71.0    + 0     Bear Confirmed
Dow Indust.   83.3    + 0     Bull Correction
S&P 500       80.8    + 0     Bull Confirmed
S&P 100       81.0    + 1     Bull Correction


Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------



 5-dma: 1.07
10-dma: 1.09
21-dma: 1.10
55-dma: 1.10


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.

-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1590      1516
Decliners    1227      1539

New Highs     278       268
New Lows       14        15

Up Volume    827M      850M
Down Vol.    813M      976M

Total Vol.  1662M     1840M
M = millions


-----------------------------------------------------------------

Commitments Of Traders Report: 11/04/03

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

It's been a long week since last we looked at the COT data
and we're still not seeing any big moves by the Commercial
traders.  The same holds true for small traders but they did
reduce some of their short positions.


Commercials   Long      Short      Net     % Of OI
10/14/03      391,972   410,299   (18,327)   (2.3%)
10/21/03      394,176   411,246   (17,070)   (2.1%)
10/28/03      391,596   412,498   (20,902)   (2.6%)
11/04/03      391,079   415,136   (24,057)   (3.0%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   18,486  -  6/17/03

Small Traders Long      Short      Net     % of OI
10/14/03      133,940    86,418    47,522    21.6%
10/21/03      136,643    88,290    48,343    21.5%
10/28/03      137,791    76,791    61,000    28.4%
11/04/03      137,829    78,206    59,623    27.6%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02


E-MINI S&P 500

Hmm... we are seeing some movement in the e-minis.  Commercials
have upped their short positions by 24K contracts.  Small Traders
may have gotten the hint too.  Short interest is up but the real
change is the 45K drop in long contracts.


Commercials   Long      Short      Net     % Of OI
10/14/03      221,897   233,066    (11,169)  ( 2.5%)
10/21/03      226,985   236,906    ( 9,921)  ( 2.2%)
10/28/03      220,171   260,644    (40,473)  ( 8.4%)
11/04/03      242,409   270,785    (28,376)  ( 5.5%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
10/14/03      161,208    59,213   101,995    46.3%
10/21/03      168,236    56,564   111,672    49.7%
10/28/03      123,569    59,742    63,827    34.8%
11/04/03      135,525    63,006    72,519    36.5%

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

This time it's the Small Traders making a move in the NDX
futures.  Long contracts are up nearly a third to more than
21K.  Commercials are still comatose but the trend is growing
slowly more bearish with a small bump in short positions.


Commercials   Long      Short      Net     % of OI
10/14/03       34,639     41,880   ( 7,241) ( 9.5%)
10/21/03       36,314     43,305   ( 6,991) ( 8.8%)
10/28/03       36,168     46,272   (10,104) (12.3%)
11/04/03       34,159     48,293   (14,134) (17.1%)

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
10/14/03       16,822     9,046     7,776    30.1%
10/21/03       16,917     9,750     7,167    26.9%
10/28/03       21,640     8,830    12,810    42.0%
11/04/03       24,132     9,703    14,429    42.6%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

There is very little change here for the Small Trader but
Commercial Traders have upped both their longs and their shorts.


Commercials   Long      Short      Net     % of OI
10/14/03       16,595     9,433    7,162      27.5%
10/21/03       16,876     9,037    7,839      30.3%
10/28/03       20,504    11,366    9,138      28.7%
11/04/03       21,756    11,903    9,853      29.3%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
10/14/03        6,427     8,495   (2,068)   (13.9%)
10/21/03        5,392     8,842   (3,450)   (23.1%)
10/28/03        5,295     8,864   (3,569)   (25.2%)
11/04/03        5,099     9,160   (4,061)   (28.5%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   8,523  -  8/26/03

-----------------------------------------------------------------


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The Option Investor Newsletter                 Thursday 11-13-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: JBLU, PCAR
Call Play Updates: APA, JCI, JBLU, MME, PGR, VRTS
New Calls Plays: DGX
Put Play Updates: ATH, AMGN, AZO
New Put Plays: NFLX


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

None


PUTS:
*****

JetBlue Airways - JBLU - cls: 55.25 chg: +1.95 stop: 55.26

Ouch!  Much like the bounce in the biotech sector the airlines
have soared higher as well and erasing most of their losses from
earlier in the week.  JBLU did more than that.  It exceeded its
early week losses and broke back above its simple 10-dma and the
round-number support/resistance level at $55.  Shares traded
above our stop at $55.26 so we're closing the play after coming
so close to our target near $50.00.  This may be just an oversold
bounce but there are so many fans for this airline/stock that it
can be tough playing the downside.

Picked on November 02 at $57.67
Change since picked:     - 2.42
Earnings Date          10/23/03 (confirmed)
Average Daily Volume:      1.5 million
Chart =


---

PACCAR - PCAR - close: 78.32 chg: +2.97 stop: 78.01

Bulls refuse to let bears have anything easy these days.  PCAR
had clearly been consolidating into a wedge for the last couple
of months.  It clearly broke down into a bearish sell signal on
its P&F and daily charts and on rising volume.  We suspected the
stock was overdue for a bounce after several days of declines and
that's what we got on Wednesday but the bounce was not excessive.
Yet this morning PCAR received an upgrade from Prudential who
raised their rating from "under weight" (a.k.a. sell) to "over
weight" (buy) and slapped an $87 price target on the stock.  PCAR
popped higher at the open and quickly traded above our stop loss
at 78.01.  Fortunately, for any bears still in the play the gains
were limited by the stock's simple 50-dma but it's unclear if
this technical resistance will hold.  We will close the play but
keep an eye on it for any roll over.

Picked on November 10 at $74.99
Change since picked:     + 3.33
Earnings Date          10/21/03 (confirmed)
Average Daily Volume:       899 thousand
Chart =



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********************
PLAY UPDATES - CALLS
********************

Apache Corp. - APA - close: 71.67 change: +0.72 stop: 69.25*new*

Just as we were beginning to wonder if our APA play was ever
going to straighten up and fly right, the stock broke out nicely
on Wednesday, scaling the resistance that had been holding it
back for nearly a month.  Proving it wasn't just a fluke, the
stock build on those gains today, almost reaching the $72 level
before relaxing slightly into the close.  It looks like we're
finally headed to that first objective near $73 and conservative
traders that bought the dip may want to harvest some gains near
that level.  A pullback and rebound from above the $70.50 level
(old resistance becomes support) can be used for new entries.
We're tightening our stop to $69.25 tonight, just below the 50-
dma ($69.35).  If this rally attempt has any legs at all, then
the 50-dma should not be revisited in the near-term.  If APA is
capable of clearing $73 resistance, then we'll turn our eyes
towards that aggressive $76 target near the top of the long-term
rising channel.

Picked on November 2nd at    $69.72
Change since picked:          +1.95
Earnings Date               1/22/04 (unconfirmed)
Average Daily Volume =     1.32 mln
Chart =


---

Johnson Controls - JCI - cls: 108.02 chg: +0.01 stop: 104.99

There it goes.  We asked for a bounce from the $105 region and
Wednesday's session delivered.  Shares of JCI shot up very
quickly at the open and then slowly drifted higher.
Unfortunately the rally stalled today and the stock traded in a
very narrow range (that's getting to be a habit) at the $108
level.  The bounce does look like an entry point for new bullish
plays but our gut is still a little cautious.  We're leaving our
stop at $104.99.

Picked on October 30 at $107.07
Change since picked:     + 0.95
Earnings Date          10/22/03 (confirmed)
Average Daily Volume:      432 thousand
Chart =


---

Jabil Circuit - JBL - close: 30.24 chg: -0.21 stop: 27.99

As you can see in JBL's chart the stock bounced with just about
everything else on Wednesday and volume was decent.  Oddly you'll
also notice that the opening price for JBL was $29.51 this
morning but that proved to be the low of the day and the $30
level held as support in the afternoon slide.  JBL appears to
still be consolidating so traders still looking for entry points
can probably take their time judging one.  Keep an eye on the
SOX, which was one of the worst performers today.  Additional
selling in the chip sector will hit JBL.

Picked on November 04 at $30.11
Change since picked:     + 0.13
Earnings Date          09/18/03 (confirmed)
Average Daily Volume:      1.4 million
Chart =


---

Mid Atlantic Med. - MME - cls: 57.68 chng: +0.38 stp: 55.55*new*

When we initiated coverage of MME, we had no illusions of a sharp
rally higher, just a steady recovery off of strong support.  So
far, we haven't been disappointed, with the stock gaining ground
on each of the past two days, gradually working its way back
towards known resistance in the $60-61 area.  Recall that MME is
set to be acquired by UNH and with the two stocks now linked at
the hip, clearly UNH's rebound off the $48 support level is
having the desired effect.  If still looking for an entry into
the play, we'd prefer a slight pullback near $57.  But entering
on further strength could be an effective strategy, if it is
accompanied by UNH pushing through the $50 level.  Note that our
stop rises to $55.55 tonight, which is just below last Friday's
intraday low.

Picked on November 11th at   $56.65
Change since picked:          +1.03
Earnings Date               2/04/04 (unconfirmed)
Average Daily Volume =        701 K
Chart =


---

Progressive - PGR - close: 76.28 chg: +0.39 stop: 72.75

It's been a week and shares of PGR have essentially gone nowhere.
That's not necessarily bad as it missed the early selling in the
markets this week but it also failed to truly rally on Wednesday.
Momentum traders might want to take a closer look at today's
close over the $76.25 mark, which has been resistance.  Maybe
tomorrow we'll see some follow through.  Take note, PGR's slow
movement makes November options a dangerous play as time premium
will erode super quick next week.

Picked on November 07 at $76.25
Change since picked:     + 0.03
Earnings Date          10/22/03 (confirmed)
Average Daily Volume:      654  thousand
Chart =


---

Veritas Software -VRTS - cls: 38.10 chng: -0.33 stop: 35.90

Every time we start to get nervous about a pullback in VRTS, the
bulls come in, buy the dip and mitigate our concerns.  Just as we
speculated might happen, Tuesday's completion of a 2-day decline
proved to be an entry point that the bulls pounced on first thing
yesterday morning, driving the stock back over $38.  Isn't it
interesting how the pattern of a couple weeks ago repeated itself
so neatly?  There's the possibility that VRTS will need to
consolidate a bit more before mounting a serious challenge on
resistance at $40, and intraday dips and rebounds above the 20-
dma ($36.62) can be used for new entries in the meantime.  With
the 30-dma now creeping over $36, our $35.90 stop should be safe
unless there is a marked change of sentiment.  With the proximity
of known resistance at $40, we still are not advocating new
breakout entries, preferring to enter on the brief and occasional
pullbacks.

Picked on October 28th at    $37.27
Change since picked:          +0.83
Earnings Date               1/21/04 (unconfirmed)
Average Daily Volume =     6.16 mln
Chart =



**************
NEW CALL PLAYS
**************

Quest Diagnostics - DGX - close: 69.46 change: +1.33 stop: 65.50

Company Description:
Quest Diagnostics was the result of a 1996 Corning spinoff, and
currently holds the title of the world's #1 clinical laboratory.
DGX performs more than 100 million routine tests annually,
including cholesterol, HIV, pregnancy, alcohol, and pap smear
tests.  Operating laboratories throughout the US and in Brazil,
Mexico, and the UK, DGX also performs esoteric testing (complex,
low-volume tests) and clinical trials.  The company serves
doctors, hospitals, HMOs, and other labs as well as corporations,
government agencies, and prisons.

Why we like it:
Following a big plunge from the $85 level over a year ago, shares
of DGX have been trading in a broad range between $50-70 with the
bulls appearing to be gaining the upper hand in recent months.
Their conviction was rewarded last month, when the stock surged
sharply higher in the wake of better than expected earnings and
the announcement that the company would begin paying a dividend.
After the initial surge to $69, the stock has been consolidating
above $65.  After just kissing the 20-dma (now $66.34) on Monday,
the stock has once again launched on a strong bullish run and
came to rest just below that pivotal $70 level today.  The
impetus for this week's bullish move appears to have been the
announcement of a new CEO, with the current CEO continuing on as
the Chairman of the Board.  Technically, we can consider today's
move to be a breakout, as DGX ended at its best level since July
of 2002.  The stock is already on a PnF Buy signal with a bullish
price target of $79 and if it can trade $70, then we'll have yet
another Buy signal to bolster the bulls' case.

Once above $70, the first significant resistance level appears to
be $75, so that will be our initial target, with $79 being our
ultimate upside objective.  Let's use a trigger at $70, with
momentum entries above that level being the first choice for
entry.  Traders willing to wait for a subsequent pullback before
entry will want to enter on a rebound from the $67.50-68.00 area
as old resistance is shown to be new support.  Based on the way
the stock rebounded from just above the 20-dma earlier this week,
we're expecting to see continued support at that average on a
deeper pullback.  Place stops initially at $65.50, below the 20-
dma and just below Monday's intraday low.

Suggested Options:
Shorter Term: The November 70 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.  But with November options expiring next Friday, using the
December 70 strike would be a better choice.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the December 75 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 look all the way out to the
January 75 Call.

! Alert - November options expire next week!

BUY CALL NOV-70 DGX-KN OI=1837 at $0.90 SL=0.40
BUY CALL DEC-70 DGX-LN OI= 909 at $2.20 SL=1.00
BUY CALL DEC-75 DGX-LO OI= 351 at $0.65 SL=0.30
BUY CALL JAN-75 DGX-AO OI= 162 at $1.05 SL=0.50

Annotated Chart of DGX:




Picked on November 13th at   $69.46
Change since picked:          +0.00
Earnings Date               1/20/04 (unconfirmed)
Average Daily Volume =        864 K
Chart =



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*******************
PLAY UPDATES - PUTS
*******************

Anthem, Inc. - ATH - close: 68.21 change: +1.30 stop: 69.50

Did we just get hit by another bear trap?  Shares of ATH gave us
the classic breakdown below strong support, with the PnF chart on
a strong Sell signal and below bullish support and the trade at
$65 looked like just the sign of weakness we had been waiting
for.  But after testing $65 as support for three days in a row,
the stock shot higher yesterday and continued that rebound today,
coming to rest above $68, near the high of the day.  This is near
the upper end of what we thought would be strong resistance and
we now have the very real possibility that the bulls will run
right through our $69.50 stop on Friday.  A rollover near current
levels can still be used for aggressive entries, but we'd now
prefer to wait for more concrete signs of renewed weakness,
ideally with price falling back under $66.  More conservative
traders may even want to wait for a drop under $64.75,
Wednesday's intraday low, before playing.

Picked on November 6th at    $67.22
Change since picked:          +0.99
Earnings Date               1/26/04 (unconfirmed)
Average Daily Volume =     1.64 mln
Chart =


---

Amgen Inc - AMGN - close: 59.95 chg: -0.33 stop: 61.51 *new*

Traders will notice that the BTK biotech index has recouped most
of its Monday-Tuesday losses with a big two-day bounce.
Fortunately, shares of AMGN did not participate in today's follow
through in the BTK.  We are a little surprised that AMGN closed
over the $60 level on Wednesday but we're encouraged to see it
slip lower again.  As of this moment we're right where we started
at $59.95.  The short-term trend of lower highs is still in
effect.  Should AMGN break this trend we don't want to be short.
Thus we're lowering our stop loss to $61.51 to keep our risk at a
minimum.  Traders looking for new bearish entries may want to
wait for a drop back through the $59.00 mark.

Picked on November 09 at $59.95
Change since picked:     - 0.00
Earnings Date          10/21/03 (confirmed)
Average Daily Volume:       8.8 million
Chart =


---

AutoZone, Inc. - AZO - close: 93.14 change: -0.49 stop: 96.25

The precipitous decline in AZO appears to have come to an end for
now, yet the rebound of the $90 level appears to have run out of
steam as well.  That leaves us on the fence as to what to expect
from the stock going forward.  There should now be strong
resistance in the $94-95 area, but the rebound earlier this week
shows us that there's clear support near $90.  Daily Stochastics
are just beginning to recover out of oversold territory, and
ideally they'll push up near overbought and tip over as price
meanders sideways.  A rollover in the oscillator, with price
action weakening below resistance will be the next viable setup
for a bearish entry.  With know support at $90 and our target in
the $86-87 area, we do not want to consider entries on a
breakdown move.  Sell into waning strength or let it go.
Maintain stops at $96.25.

Picked on November 9th at    $93.30
Change since picked:          -0.16
Earnings Date              12/22/04 (unconfirmed)
Average Daily Volume =     1.10 mln
Chart =



*************
NEW PUT PLAYS
*************

Netflix Inc - NFLX - close: 48.50 change: -1.79 stop:

Company Description:
Launched in 1998, Netflix is the world's largest online movie
rental service, providing more than one million subscribers with
access to a comprehensive library of more than 15,000 DVD titles.
For $19.95 a month, Netflix subscribers can rent as many DVDs as
they want, with three movies out at a time, and keep them for as
long as they like. There are no due dates and no late fees. DVDs
are delivered directly to the subscriber's address by first-class
mail from shipping centers throughout the United States. Netflix
can reach more than seventy percent of its subscribers with
generally overnight delivery. The Company also provides
background information on DVD releases, including critic reviews,
member reviews and ratings and personalized movie
recommendations.  (source: company press release)

Why We Like It:
It's really hard to find any bad news on NFLX.  Everyone I know
loves the service.  Obviously investors do to.  Shares of NFLX
have gone from $5 to $60 (+1100 percent) in just about a year's
time.  Granted earnings are doing great and expected to keep on
doing great but there appears to be some room for more profit
taking.

The stock got hammered on Nov. 6th with a big volume surge of
selling without any discernible catalyst.  The selling continued
the next day, again on extremely high volume, before finding
support above the $45 level.  Yesterday's market bounce took it
back to the $50 mark but today's action looks like a failed
rally.  Actually it looks like the bearish reversal candlestick
pattern labeled "dark cloud cover".

We're going to be aggressive and suggest put plays at current
level but with a very tight stop over the recent highs at $51.01.
Traders might want to wait and see some follow through (like a
move under $48.00) before initiating any new positions.  There is
obvious support at $45 and its simple 50-dma but NFLX could hit
$40 if the profit taking picks up speed.

Traders should note that this is an aggressive play and not for
everyone.  NFLX typically carries an EXTREMELY high amount of
short-interest and when they cover it gets painful.  The need for
good stop loss is important.  Plus, after such a strong rise from
its IPO price less than two years ago there is the remote risk of
a stock split announcement.

Suggested Options:
We like the December 50's but the 45's could work for the
speculating trader.

BUY PUT DEC 50.00 QNQ-XJ OI=1092 at $5.20 SL=3.00
BUY PUT DEC 47.50 QNQ-XS OI= 648 at $3.90 SL=2.00
BUY PUT DEC 45.00 QNQ-XI OI=1452 at $2.80 SL=1.45

Annotated chart:




Picked on November 13 at $48.50
Change since picked:     - 0.00
Earnings Date          10/15/03 (confirmed)
Average Daily Volume:       1.7 million
Chart =



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Please read our disclaimer at:
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Contact Support
The Option Investor Newsletter                 Thursday 11-13-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - DGX
Traders Corner: Hear The Music?  Baby, Let's Shake A Tailfeather
Traders Corner: Divergence Makes It Taste Better


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

Quest Diagnostics - DGX - close: 69.46 change: +1.33 stop: 65.50

Company Description:
Quest Diagnostics was the result of a 1996 Corning spinoff, and
currently holds the title of the world's #1 clinical laboratory.
DGX performs more than 100 million routine tests annually,
including cholesterol, HIV, pregnancy, alcohol, and pap smear
tests.  Operating laboratories throughout the US and in Brazil,
Mexico, and the UK, DGX also performs esoteric testing (complex,
low-volume tests) and clinical trials.  The company serves
doctors, hospitals, HMOs, and other labs as well as corporations,
government agencies, and prisons.

Why we like it:
Following a big plunge from the $85 level over a year ago, shares
of DGX have been trading in a broad range between $50-70 with the
bulls appearing to be gaining the upper hand in recent months.
Their conviction was rewarded last month, when the stock surged
sharply higher in the wake of better than expected earnings and
the announcement that the company would begin paying a dividend.
After the initial surge to $69, the stock has been consolidating
above $65.  After just kissing the 20-dma (now $66.34) on Monday,
the stock has once again launched on a strong bullish run and
came to rest just below that pivotal $70 level today.  The
impetus for this week's bullish move appears to have been the
announcement of a new CEO, with the current CEO continuing on as
the Chairman of the Board.  Technically, we can consider today's
move to be a breakout, as DGX ended at its best level since July
of 2002.  The stock is already on a PnF Buy signal with a bullish
price target of $79 and if it can trade $70, then we'll have yet
another Buy signal to bolster the bulls' case.

Once above $70, the first significant resistance level appears to
be $75, so that will be our initial target, with $79 being our
ultimate upside objective.  Let's use a trigger at $70, with
momentum entries above that level being the first choice for
entry.  Traders willing to wait for a subsequent pullback before
entry will want to enter on a rebound from the $67.50-68.00 area
as old resistance is shown to be new support.  Based on the way
the stock rebounded from just above the 20-dma earlier this week,
we're expecting to see continued support at that average on a
deeper pullback.  Place stops initially at $65.50, below the 20-
dma and just below Monday's intraday low.

Suggested Options:
Shorter Term: The November 70 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.  But with November options expiring next Friday, using the
December 70 strike would be a better choice.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the December 75 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 look all the way out to the
January 75 Call.

! Alert - November options expire next week!

BUY CALL NOV-70 DGX-KN OI=1837 at $0.90 SL=0.40
BUY CALL DEC-70 DGX-LN OI= 909 at $2.20 SL=1.00
BUY CALL DEC-75 DGX-LO OI= 351 at $0.65 SL=0.30
BUY CALL JAN-75 DGX-AO OI= 162 at $1.05 SL=0.50

Annotated Chart of DGX:




Picked on November 13th at   $69.46
Change since picked:          +0.00
Earnings Date               1/20/04 (unconfirmed)
Average Daily Volume =        864 K
Chart =



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Hear The Music?  Baby, Let's Shake A Tailfeather
By Mike Parnos, Investing With Attitude

The BP Boogie has generated a lot of interest among CPTI students.
It's not a tango, a rumba, mambo or even the hokey pokey, but our
readership of movers and shakers wants to start shaking and moving
– without having to visit a chiropractor when it's over.

It warms the cockles of my heart (yes, we all have cockles that
need warming) to see enthusiasm and a willingness to absorb
knowledge.  Well, let's put it to the test

Hear Ye, Hear Ye!
I received a suggestion about renaming the BP Boogie and it makes
a lot of sense.  From now on, since we use both bull put spreads
and bear call spreads, we'll call it the CS (Credit Spread)
Boogie.

Before We Step Onto The Dancefloor – A Strategy Overview
In Sunday's (November 11th) column I described the CS Boogie
strategy.  We're essentially creating a spread and taking in
premium.  We're holding onto the spread until either:
1. Expiration when the entire spread will expire worthless, or
2. We have to make an adjustment of closing out the original
spread and re-establishing another credit spread, trading twice as
many contracts
3. We will repeat the process as many times as necessary until
expiration when, hopefully, the options of the spread in existence
will expire worthless and we'll keep the premium taken in.

Here We Go
I know I said we prefer a trending market, but for educational
purposes, I'm going against the prevailing uptrend and put on the
initial CS Boogie with a bear call spread.  I do this with
anticipation of possibly having to close out the bear call spread
if/when the current uptrend continues.  For our "hypothetical"
example, we'll start out small – with only two contracts.  With
the CS Boogie, you'll be surprised how to see much you can make
trading a small number of contracts.

The Trade
With the OEX trading at $522.99, we're going to:
Sell two contracts December OEX 520 calls @ $11.20 ($2,240)
Buy two contracts December OEX 535 calls @ $4.50 ($900)
Total credit and potential maximum profit: $6.70 ($1,340)
Our exposure (risk) is $8.30. ($1,660)

What If . . .
If the OEX finishes below $520, both the short December 520 calls
and the long December 535 calls will expire worthless.  We'll keep
the $6.70 ($1,340) and go on our merry and profitable way.

If the OEX moves us, we're going to wait until it costs $13.40 to
close out the bear call spread.  Then, we're going to close it out
and find a bull put spread.  This new bull put spread will be out
of the money and we will trade a sufficient number of contracts to
enable us to replenish the $13.40 we just spent to close out the
original bear call spread.  We may have to widen the spread from
15 to 20 points to generate the appropriate amount of premium.
Here is the part that will require additional maintenance.  That's
why we started with just two contracts.

We'll have to monitor the trade, but, unless it goes dramatically
in the wrong direction, the CS Boogie is a "hands off" kind of
trade.  We'll still go on our profitable way, it's just a slightly
more scenic journey.

A Correction
In last Sunday's column I wrote that with the OEX there is no risk
of assignment.  Well, it was brought to my attention that it is
technically possible for an OEX option to be exercised.  However,
if the rules of the strategy are followed, there is virtually NO
chance.  Why?  Because the only time you're really in jeopardy of
an exercise is if the option is deep in the money with little or
no time value remaining.

By The Way
I made a few errors in the Sunday (11/9/03) column's explanation
of the CS Boogie.  I corrected things in a special Monday
(11/10/03) column.  I've requested that OptionInvestor's crack
technical staff make the necessary corrections to the Sunday
column.  Therefore, the entire (correct) explanation of the CS
Boogie strategy should (in the hopefully immediate future) be able
to be found there.  If anything is unclear, don't hesitate to send
me your questions.
_________________________________________________________________

NOVEMBER POSITIONS
Position #1 – SPX Iron Condor – Trading @ 1058.41
We sold 10 contracts of November SPX 985 puts and bought 10
contracts of November SPX 975 puts for a credit of $1.10 ($1,100).
Then we sold 7 contracts of November SPX 1075 calls and bought 7
contracts of November SPX 1090 calls for a credit of $1.50
($1,050) and a total net credit of $2,150.
We've created a maximum profit range of 985 to 1075.  With two
weeks left, anything can happen.  A pullback would be nice.

Position #2 – AFCI Iron Condor – Position closed for $700 loss.
Que sera, sera.

Position #3 – OEX Iron Condor (By Request) – 522.99
We sold 10 contracts of the OEX November 490 puts and bought 10
contracts of the OEX November 480 puts for a credit of about $.90.
Then, sold 10 contracts of the OEX November 545 calls and buy 10
contracts of the OEX November 555 calls for a credit of about
another $.90.  Our total net credit will be about $1.80.  Our
maximum profit range is 490 to 545.

Position #4 – BBH – Siamese Condor - $128.85
Sell 10 contracts of the BBH November $130 puts and 10 contracts
of the BBH November $130 calls for about $8.50.  Then, buy 10
contracts of BBH November $140 calls and 10 contracts of the BBH
November $120 puts for about $2.40.  The net credit should be
about $6.10.  Our profit range is $123.90 to $136.10 and those are
also our exit parameters.  The closer BBH finishes to $130, the
more we can make.

Position #5 – QQQ Put Calendar Spread – Trading @ $35.77
We decided to risk a buck.  Since many folks think the market is
due to correct.  We created a cheap play that will let us take
advantage of a nice down move.  Meanwhile, we will continue to
sell against the January put while we wait.

We bought 10 contracts of January 04 QQQ $32 puts and sold 10
contracts of October 03 QQQ $32 puts for a total debit of $1.00
($1,000).  The October $32 puts expired worthless and, on
Wednesday, we rolled out to the November $32 and took in a $.30
credit.  We now have a new cost basis of $.70.

OEX – Bearish Calendar Spread – OEX @ $522.99
We own 8 contracts of OEX November 470 puts @ $10.60 and sold 8
contracts of OEX September 470 puts @ $2.20 for a total debit of
$8.40.  The Sept. 470 puts obviously expired worthless.  We sold
the October 490 puts, took in another $3.10 and those also expired
worthless.  On Thursday we sold the November 485 puts for $2.60.
Our cost basis is now $2.70.

QQQ ITM Strangle – Ongoing Long Term -- $35.77
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.  Then we
sold 10 contracts of the QQQ Oct. 33 puts and 10 contracts of the
QQQ Oct. 34 calls for a total credit of $1,900.  We bought back
our $33 puts and $34 calls and rolled out to November $34 puts and
$34 calls, taking in another $1.15 ($1,150).  So far, so good,
but, again, a pullback would be nice.
_____________________________________________________________

Two cannibals are eating a clown . . . One says to the other,
"Does this taste funny to you?"
_____________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner."  They're waiting for you
24/7.
___________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.

Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________

Couch Potato Trading Institute Disclaimer

All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.


**************
TRADERS CORNER
**************

Divergence Makes It Taste Better
by Mark Phillips
mphillips@OptionInvestor.com

I've been playing with that title for weeks now and just can't
quite seem to get it right.  I was hoping to come up with a witty
play on the old TV ad about cheese making everything taste better.
Being an unqualified cheese-lover myself, I always liked that
slogan.  But I digress.  I want to talk about technical analysis
today, as a welcome respite from the weightier topics I've been
droning on about over the past couple weeks.  But first a bit of
background.

When I first entered the Financial markets, I approached them with
the same diligence and approach that served me so well in the
engineering world.  Namely, everything in the physical world can
be described and defined in terms of some mathematical equation
and all we have to do to achieve Nirvana is find that ultimate
perfect mathematical alchemy.  Clearly, more than a decade in the
real world of engineering challenges, successes and defeats had
not dulled my sense of naivete!

So off I went, purchasing the tools I would need for my new
enterprise, a new computer, several charting programs that
promised to hold the key to perpetual winning trades, a data
service, innumerable books on Technical Analysis from the likes of
Jack Schwager, John Murphy and Martin Pring.  Surely all the
wisdom of the ages and the secret to plucking money out of the
market would be contained within my new acquisitions.  All I had
to do was find the nuggets and meld them together into a trading
strategy.

I started first with the computer programs, as it seemed the
logical point to begin.  Afterall, I was an engineer who worked
constantly with computers, and hadn't found the computer program I
couldn't lick, WITHOUT reading the manual.  How's that for foolish
arrogance! It didn't take long to figure out that I had entered a
world with its own language, and I needed a dictionary in a big
way.  Each program had numerous ways of displaying price charts,
each with its own unique advantages, and literally hundreds of
technical indicators, all of which could be reprogrammed, modified
and combined into the "perfect trading system".  For an engineer
this was the "cat's meow"!

So I did what any self-respecting engineer would do, I diligently
read and reread all my new books, and actually read the manuals
for the computer programs.  Gradually I came to understand what I
had my hands on, and how to use it.  Terms like Stochastics, RSI,
MACD, Bollinger Bands, and On Balance Volume were no longer
foreign concepts and actually began to make sense to me, and what
I discovered was that while there were literally hundreds of
indicators available, I could only use a few at a time.  I might
be able to put 35 technical studies on a chart, but there is no
way to make sense of the resulting jumble of criss-crossing
squiggles on the page, much less use them to determine a logical
and well considered plan of action for trading.  Besides, I
quickly found that it is possible to put enough indicators on a
chart that you get strong signals both to the long and short side
-- at the same time!!  After innumerable instances of that you can
imagine I spent a fair amount of time scratching the old noodle!

So now I needed a way to boil all my newfound knowledge down to
the 2 or 3 "magic" indicators that would make successful trading
as easy as rolling off a log.  I really liked the patterns I saw
from oscillators like Stochastics, Momentum, MACD and RSI, but
there were dozens of these oscillators.  They all painted a
similar picture; some were more responsive, while others were more
consistently accurate.  I needed to choose 2 or 3, learn how to
use them and apply them consistently.  I finally settled on
Stochastics and RSI, but the long list of losing trades told me
there was still something missing.

I went back to my Technical Analysis books and began searching for
some nugget of wisdom that I had somehow overlooked.  Perhaps
there was something I had missed that would point me towards the
oscillators that were "the best".  Ah, there's that naivete again!
But I did find something that caught my attention as potentially
significant.  Periodically the term 'Divergence' would pop up with
an accompanying chart or two, but it seemed rather subjective to
me.  Then I stumbled across a book by William Blau titled
"Momentum, Direction and Divergence".  Inside the dust jacket, I
noted that Mr. Blau was an electrical engineer -- the concept
can't be all bad.  So I figured, if divergence is important enough
to be listed in the title of a technical analysis book written by
a fellow engineer, there must be something to it, right? Well,
after reading the book, I have to report that I didn't find the
holy grail, BUT it did convince me that I needed to learn more
about the concept, believing that it was one of the final
obstacles standing between me and trading success.

After considerable study, and endless hours of staring at and
manipulating charts and technical studies, the fog began to clear
and I could see the fruits of my labors.  Divergence is a
subjective tool, requiring some interpretation, which is probably
why it took so long to sink into my thick skull.  Once the light
went on, the pieces began to fall into place almost by themselves.
I finally settled on two oscillators, Stochastics and RSI, and
determined to use them as the basis for my technical trading
decisions, specifically when they both gave me a strong divergence
signal.

Now that you've learned more about my journey than you probably
cared to know, would you like to see what I learned?  Sorry, that
was a trick question, as that's where we're headed anyways.  I'm
not going to go into the details of any specific oscillator, as
that information can be found any introductory Technical Analysis
textbook.  We want to focus our energy on the more subtle (and
very useful) topic of divergence.

Let's start with a basic description of what Divergence is.
Divergence consists of higher highs (or lower lows) on the price
chart that are not matched by higher highs (or lower lows) on the
oscillator.  It can be viewed the other direction as well.
Divergence also consists of higher highs (or lower lows) on the
oscillator that are not matched by higher highs (or lower lows) on
the price chart.  I've found that when I talk about divergence, I
need to be very clear to avoid confusion.  You see there are
actually four specific cases that can occur -- 2 bearish and 2
bullish.  I've shown them in a numbered list for those of you that
are similarly analytical.

1. Higher highs in price, but the oscillator only paints equal or
lower highs.  This is bearish, as it shows insufficient buying
interest to get the oscillator as deep into overbought territory
as on the prior upward thrust, even though price was able to reach
a higher high.  The analogy I like to use to explain what is
physically going on is the stretching of a spring.  More force
(price strength) has been applied to stretching the spring
(oscillator) to the upside, but for some reason it was
insufficient to produce greater deformation of the spring than on
the last attempt.

2. Higher highs in the oscillator, but only equal or lower highs
in price.  Counter-intuitive as it may seem, this is also bearish,
as even though the oscillator probed deeper into overbought (more
buying pressure exerted), it wasn't good enough to get price to
new highs.  This is the equivalent of applying less force to the
spring, but having it actually stretch further than on the last
attempt.

3. Lower lows in price, but equal or higher lows in the
oscillator.  This is the inverse of what we see in case #1, giving
us bullish divergence, with the drop to new price lows unable to
pressure the oscillator deeper into the oversold region.  As I'm
sure you can see, we've leaned harder on the spring, but we
haven't been able to compress it quite as far as on the last
attempt.

4. Lower lows in the oscillator, but with price holding at equal
or higher lows.  This is the other bullish case, where the drop in
price has taken less energy (price movement) to accomplish.  That
would seem to imply weakness, but with the spring compressed
further than on the last attempt and less force needed to
accomplish it, when a portion of that downward force is removed,
it tends to spring back harder to the upside.

What this Divergence tells us is best described with annotated
charts, so for clarity, let's look at a couple of examples.  To
keep the charts as uncluttered as possible, I will only use the
Stochastics oscillator in these examples.  But bear in mind that
divergence can be used with any oscillator that bounces between
overbought and oversold extremes.  One other note about our
examples.  I've deliberately used some old charts so that we can
keep our attention focused on the principle of divergence, not on
how we can apply what is shown on these charts to go out tomorrow
and place a trade.  You know how the saying goes..."Give a man a
fish and feed him for a day.  Teach him how to fish and feed him
for a lifetime."  Ladies, please don't take offense -- I'm just
repeating it how I heard it.

Weekly Chart of the NASDAQ-100 Trust (QQQ): 2001-2002




See how the price rebound off the September 2001 lows topped out
significantly below the highs from the middle of 2001?  When those
Stochastics tipped over and dropped out of overbought, the QQQ's
fate was sealed, with a solid dose of bearish divergence.  You
should be able to see how this matches the verbal description of
Case #2 Bearish Divergence above.  Moving out a bit further along
the past timeline gives us divergence going the other direction.

Weekly Chart of the NASDAQ-100 Trust (QQQ): Late 2002




Last October, the QQQ was drilling down to new multi-year lows,
but the Stochastic oscillator was not confirming that price
weakness.  Note how Stochastics put in a higher low to go with the
lower price low, and we have bullish divergence matching case #3.
See how easy it is?  We find the divergence and then wait for a
move out of oversold territory to take that position trade.
Alright, one more QQQ example, this time from the more recent
past.

Weekly Chart of the NASDAQ-100 Trust (QQQ): 2002-2003




This is actually case #4 Bullish Divergence, but it is not as
clear cut since the Stochastics lows are roughly equal.  But this
is the divergence setup that resulted in the rise that has taken
the QQQ to its current level near $35.  I wouldn't say that a
position would have necessarily been held through all the
volatility of the past several months, but it certainly would have
been possible to take a chunk out of the middle of that move.

I know I said we weren't going to look at any current charts, but
I can't resist throwing this one up, as I think it is the real BIG
PICTURE for the next few months.  We're seeing some pretty
powerful divergence on the monthly chart of the S&P 500 and we'd
have to be pretty foolish to ignore what it's telling us.  Since
you're all experts on divergence by now, I'm betting you can all
see what is setting up with those lower price highs and much
higher oscillator highs relative to the top in early 2002.

Monthly Chart of the S&P 500 ($SPX)




Unless the SPX can break out above the 1170 area prior to the
monthly Stochastics rolling down out of overbought territory,
we're looking at a very nice setup for a longer-term downside
trade, kicking off potentially early next year.

While Divergence is not the magic indicator that I have searched
long and hard for (like all the rest, it is sometimes early, late
or simply wrong), but it does something very valuable for us.  It
allows us to more accurately interpret the signals on our charts
without having to add a plethora of technical studies that simply
clutter the charts and make them harder to read.  While Divergence
doesn't always pan out the way we expect, when it is right, the
moves it forecasts can be significant.

Through the use of a couple oscillators and drawing some simple
trendlines, we can uncover some truly amazing trading
opportunities.  So now that you know the basics, grab your
favorite charting program and start drawing some trendlines on
your favorite oscillators.  There's no telling what little gems
you may uncover.

Best Trading Wishes!

Mark


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