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Daily Newsletter, Tuesday, 12/09/2003

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The Option Investor Newsletter                Tuesday 12-09-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Considerable Period
Futures Markets: Paper Pyramid
Index Trader Wrap: Dow 10,000 and Fed's comments finds selling
Market Sentiment: Fed Stays, Investors Don't


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      12-09-2003           High     Low     Volume Advance/Decline
DJIA     9923.42 - 41.90 10003.12  9916.90 1.79 bln   1257/1954
NASDAQ   1908.32 - 40.50  1956.97  1906.84 1.80 bln    990/2249
S&P 100   524.15 -  3.52   529.14   523.63   Totals   2247/4203
S&P 500  1060.18 -  9.12  1071.94  1059.16
W5000   10326.70 - 98.50 10449.94 10318.40
RUS 2000  534.54 -  8.50   544.85   534.26
DJ TRANS 2920.92 -  8.60  2948.66  2919.74
VIX        17.63 +  1.09    17.80    16.56
VXO (VIX-O)17.08 +  0.77    18.00    16.40
VXN        28.32 +  0.77    28.47    27.35
Total Volume 3,946M
Total UpVol    955M
Total DnVol  2,949M
52wk Highs  617
52wk Lows    33
TRIN       1.38
NAZTRIN    1.61
PUT/CALL   0.73
************************************************************

Considerable Period

That was not how long the Dow lingered over 10,000 on Tuesday.
The hang time was far less than two minutes and the result was
exactly what I had expected. The Dow slipped back to 9960 and
held there until after the Fed announcement. There was a
valiant effort to hit D10K once more after the announcement
but that effort fell short by .46 of a point. Close enough
for me and it was close enough for the sell programs as well.

Wilshire-5000 Chart - Daily


Dow Chart - Daily


Nasdaq Chart - Daily



The morning opened with a mission and that mission was to hit
D10K and put that target behind them. Many of the traders on
the floor at the NYSE brought their Dow 10000 hats with them
to work today. Does that give you a clue that the fix was in?
Once that mission was accomplished in the first ten minutes
of trading investors were left to focus on economic reports
and wait for the Fed. The economics were not pretty.

The Weekly Chain Store Sales dropped -2.5% compared to -0.1%
the prior week. This was the biggest drop in sales in three
years. The excuse was the snow in the Northeast despite the
early reports that stores were packed over the weekend even
with the snow. Somebody is wrong. If stores were packed in
the Northeast then they must have been vacant elsewhere.
There are definitely some conflicting signals in the retail
sector and there are some signs of rising prices making
discounting difficult.

The second report was the Richmond Fed Manufacturing Survey
and it also disappointed with a +11 compared to last months
+20. If you will remember it was just yesterday that the
Kansas City Fed Survey fell from +28 to +6 with some nasty
drops in the internals. The Richmond Fed Survey showed that
Shipments fell from 20 to 11 but New Orders rose from 6 to
14. This was more neutral than the Kansas City Fed number
but still a drop. Production on the Kansas survey fell
to 6 from 28, Shipments to -1 from +21, New orders to 14
from 29. The Kansas survey was not positive in any respect
from my view. With the Richmond Fed Survey confirming the
Kansas numbers it should not take a rocket scientist to
conclude the recovery is slowing.

This weighed on the markets but with the Fed meeting underway
the focus was on the 2:15 announcement and not the economics.
The Fed announcement had the potential to be the economic
trump card and nobody was making any bets until that card
was shown.

The Wholesale Trade report which showed a sharp increase in
sales also failed to lift the markets. Sales were up +2.0%
and inventories were up +0.5%. This was an October number so
the revelation was old news and not earth shaking. There was
a sharp drop in the inventory to sales ratio to 1.18 and an
all time record low. I have conflicting thoughts about that.
First, it suggests that there is a huge inventory build
somewhere in our future. Second, it makes me wonder where
the inventory is going to come from for 4Q sales. You can't
sell it if you do not have it and the two Fed surveys show
that nobody was making any in November. If demand were
suddenly to surge there would be a strong inventory short
squeeze and you know who would get squeezed. The consumer
would end up paying more if retailers are fighting for the
product. Remember Chicken Dance Elmo last year? They were
selling for 2-3 times retail on EBAY because the stores
had no inventory.

The Dow had plenty of support this morning or the pull back
would have been much worse. GM soared +1.50, bringing to
almost $5 the last week's gain after they said their pension
returns were +14% for the last year. They only need +8% to
keep them fully funded and +14% is almost twice that amount.
Two years ago their $44 billion pension liability was the
topic of conversation constantly and how would they ever
recover. Evidently a little Fed liquidity injection and a
nine-month bull market was all it took. It also did not
hurt having an upgrade from Goldman Sachs to provide some
short covering urgency.

UTX, GE and MMM also helped boost the market as each made
new highs for the month and new 52-week highs in the case
of MMM and UTX. Unfortunately they all closed well off
their highs. Dow component HPQ tried hard to help out with
an upbeat forecast but HPQ ended up in the red. Fiorina
said HPQ expects to grow its earnings +20% per year in
2004 and beyond. I listened to an in-depth interview with
her on Kudlow-Cramer tonight and I was impressed. She took
the hardball questions and the comparisons with IBM and
DELL and really surprised me with the answers. I have to
admit I never thought I would buy HPQ due to years of
lackluster performance by CPQ tainting my memory but I was
impressed. She has taken the enormous heat from the merger
and even before that and has not wilted. I am thinking
about adding HPQ to our TOP 50 Stocks for 2004 Special
Investor Guide as a wildcard play. I have to do some more
research but if what she said was true there is plenty of
upside potential there.

One thing Fiorina did say negative was there is no bounce
in IT spending in the 4Q. She said there was no end of
year flush the excess budget buying as in years past. She
also said IT spending in 2004 was likely to be flat at
maybe twice the GDP. Assuming the GDP is 4.5% that keeps
the IT spending under 10% growth and does not suggest a
strong IT recovery. This could have helped accelerate the
Nasdaq slide and at -40 points it was definitely downhill.

The biggest news of the day was of course the Fed meeting.
The answer to the $64 trillion question was, yes. They kept
the "considerable period" statement in the forecast and
gave the markets a holiday gift. At least that is what
they thought they were doing. In order to leave it in they
played with the context and the preface to that statement
to give them some wiggle room. The initial reaction was
positive and the Dow soared back to 9999.56 again but once
the impact filtered through it was lights out for the bulls.
It is not that there was anything bad in the statement and
in reality it was just one factor in the D10K sell off.
One analyst suggested maybe they are telling us the
economy is not as strong as we thought. I seriously doubt
it but that view was making the rounds. Of course they
do have inside data we do not have so it could take a
couple more months to know for sure.

Here is the text of the statement:

The Committee continues to believe that an accommodative
stance of monetary policy, coupled with robust underlying
growth in productivity, is providing important ongoing
support to economic activity. The evidence accumulated
over the intermeeting period confirms that output is
expanding briskly, and the labor market appears to be
improving modestly. Increases in core consumer prices
are muted and expected to remain low.

The Committee perceives that the upside and downside risks
to the attainment of sustainable growth for the next few
quarters are roughly equal. The probability of an unwelcome
fall in inflation has diminished in recent months and now
appears almost equal to that of a rise in inflation.
However, with inflation quite low and resource use slack,
the Committee believes that policy accommodation can be
maintained for a considerable period.

The key points are "output expanding briskly, labor market
improving modestly, prices low". All three of those items
are past tense if we are to believe the recent economics
but that is not the problem.

The problem was "unwelcome fall in inflation has diminished"
and "with inflation quite low and resource use slack". With
these words they sank the bond market and suggested that
contrary to the explicit English there could be a rate hike
in our March future. If deflation fears have diminished then
inflation, which is already beginning to appear, could rise
quickly. As long as the larger risk was deflation the bond
market felt safe with their long term investments. The
inflation statement put a qualifier on the "considerable
period" sentence. Reading between the lines it says if
we see inflation rising and/or an uptick in capacity
utilization then all bets are off. This was always implied
in past Fed stances but by adding the inflation tag line to
the considerable period context they set the stage for a
faster exit from accommodation if needed. Bonds crashed on
fears that the inflation trigger could be pulled at will
and they no longer had the "considerable period" of safety
despite those words in the announcement. Ten-year yields
jumped from 42.09 at the announcement to 43.52 at the close.
This almost completely retraced the drop from Friday which
was the biggest one day drop since Jan-2002. Easy come,
easy go.

The capacity portion of the announcement does not really
produce any worry. The Fed seldom raises rates in these
situations until the capacity utilization is over 80%. It
is currently only 75% and should take many months to rise
to the 80% level. Durable goods utilization is only 70.5%.
With this much excess capacity it is tough to make the
"risk of deflation has been minimized" argument. But then
the Fed said it so it must be true or at least that is the
way the bond market reacted.

The stock market reaction after the announcement probably
had more to do with the touch of Dow 10,000 than it did
with the Fed but there always has to be an excuse. Nobody
expected the Fed to raise rates and very few people
expected the Fed to leave the phrase alone. The Fed
performed as expected and investors simply sold the news.
There were seven sell programs and only two buy programs
in the 30 minutes after the announcement. Obviously
institutions were ready and waiting and hoping for a post
announcement spike to provide the volume to exit safely.

The Dow effectively made a double top today at 10,000
intraday and failed both times. While it looks spectacular
on the charts it is not material until we see what follow
through appears. The real key is the next support level.

Dow Intraday Chart


Dow 30 min Chart



The Dow held 9850 since Dec-1st and that is strong support.
The -41 drop today was nothing and only brought it back to
the top of last weeks range. It only appears more important
because of the touch at 10,000 and the dramatic post meeting
drop. The Dow has three critical levels of support at 9850,
9725 and 9600. The odds of 9850 being tested are good. 9725
is possible and 9600 would be only a remote possibility
before the Santa rebound. While I expect a serious bout of
profit taking in January I also expect us to remain range
bound between 9700-10000 until year end. There is too much
support below and too much overhead supply between 10000
and 10200 to break out of either side of the range. At
least that is the model I am going with today. The way
this market has been acting anything is possible.

The more important breakdown today was the Nasdaq. The
Nasdaq broke a level of serious support at 1925 (50 DMA)
and appears headed to 1880. It was barely able to remain
above 1900 at the close. While the 50 DMA was never the
strong support for the Nasdaq as it has been for the Dow
it was still a market milestone. The 100 DMA at 1850 would
be the next crucial test but baring a disaster before the
holidays I would be surprised to see it tested.

Nasdaq Chart 60 min



For the balance of the week the markets need to find a sector
to lead the way back to neutral. Chips led the Nasdaq down
with Intel dropping -10% since last Thursday. The SOX broke
its 50 DMA which HAS been support since March. This is a
critical test for the techs. The bank index dropped to a
new low for the month on warnings from Washington Mutual
and National City that mortgage loan demand was down and
corporate borrowings were declining. Home builders dropped
like a rock on the mortgage news despite record earnings
by HOV and raised guidance. There were comments making the
rounds that the outlook for the first quarter was softer
than originally thought. Even the Biotech index was sliding
on problems with the drug pipeline.

The only economic report for Wednesday is the weekly
Mortgage Application Survey which could help or hurt the
homebuilder sector depending on the results. That leaves
the markets free to focus on any new earnings warnings.
The Nikkei opened down -200 points on our performance
and our futures are down slightly at 8:PM. Thursday and
Friday the pace of the economics releases picks up and
you can bet there will be some more rehashing of the Fed
statement until every word has been dissected hundreds of
times. I am still expecting a slight pullback this week
and then a rebound into the holidays. Use the support
levels I outlined above to plan for that rebound. The
wildcard is the profit taking by institutions. Eventually
somebody is going to pull the trigger that fires the
starters gun and the race will be on. I am just betting
that it does not get serious until January. I am hoping
that the majority of funds will hold out hoping for one
last bounce into the end of year retirement contributions
and a chance to push tax consequences into 2004. This is
obviously just speculation based on historical trends but
so far the script has played out as we expected. For the
rest of the week I would be patient about entries and let
prices come to you.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Paper Pyramid
Jonathan Levinson

The Dow beat by a penny, printing 10,001 for a few seconds before
it fell back lower to await the FOMC announcement.  The FOMC
reaffirmed its myopia, stated its intention keep rates low "for a
considerable period", noted that the risks of inflation and
deflation appear to be balanced, and then stepped back.  Bonds
cratered, reversing earlier gains, followed by equities with the
NQ far out ahead to the downside, gold held its earlier gains and
silver spiked up.  The US Dollar Index gave back most of its
earlier gains in a sharp selloff.  The Fed appeared to achieve
the worst possible effect for an initial market reaction, as
bonds and the dollar sold off against strength in commodities and
metals.

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 rose into the FOMC announcement and sold off
in the afternoon, trading 88.55 as of this writing.  Gold and
silver were very firm, but equities got sold across the sectors.
The CRB gained .41 to close at a new 7 year high at 261.05,
another refutation of the Fed's "no-inflation" mantra.

Daily chart of December gold


Gold went higher today, printing a session high of 410.40 and
closing higher by 1.80 at 409.30.  Silver added .05 to close at
5.645. The anticipated breakout above the rising upper trendline
did not come, but the daily cycle oscillators are now trending in
overbought territory, and the Fed's words were nothing if not
bullish for gold and silver.  The relative weakness in gold
compared with silver's big 1.53% gain is worrisome, as is the
selloff in gold shares, with the HUI –9.46 to 242.22 and the XAU
–3.19 at 107.83.  Goldbugs prefer not to see these shares
following the broader equity markets lower, but for now the
strength in the metals themselves continues.  Support on February
gold is at 403, followed by 387.


Daily chart of the ten year note yield


We may have witnessed the end of the housing bubble, with housing
stocks selling off sharply following the Fed's announcement.  The
reason for that selloff was the sudden dive in treasuries,
driving up the yield.  The TNX gained 7.4 bps to close at 4.352%.
A break above 4.5% appears imminent and should confirm a new
bearish trend in bonds.  At this rate we could see that by
Thursday.


Daily NQ candles


The NQ was a bear's best friend today, dragging heavily in the
upphases and excelling during the downs.  The last foothold on
rising support at 1380 was today's low on a bearish engulfing
candle.  This print was sufficient to bring an early end to the
daily cycle upphase from a lower oscillator high.  Furthermore,
while the YM was printing new year highs, the NQ barely made it
above last week's lows.  If 1380 breaks, it should be sufficient
to rouse ES and YM bulls out of their reverie and kick off more
substantial selling.


30 minute 20 day chart of the NQ


The extent of the NQ's destruction is better depicted on the 30
minute chart, with a bullish wedge invalidated an last week's
supports decisively broken.  Again, 1380, followed by 1358 are
the levels to watch.  However, with the 30 minute cycle downphase
growing long in the tooth, there is the potential for a bounce.
Any upside will have to contend with the daily cycle downphase
kicked off yesterday, and so we're left with a juxtaposition
between these two key cycles.  Below 1380 it will appear that the
daily cycle is dominant, and below 1358 the 30 minute cycle will
begin trending in oversold territory.  A bounce back above 1392
could "undraw" the daily sell signal and would likely confirm a
new 30 minute cycle upphase.


Daily ES candles


By comparison with the NQ, the ES barely budged, although it
underperformed the YM substantially.  Although Prophetcharts
doesn't display the upper shadow on today's candle, there was a
spike failure to 1072, leaving a gravestone doji print.  The move
truncated the daily cycle upphase but didn't give us the bearish
cross printed on the NQ daily.  Note that the equivalent selloff
would have brought the YM to 1045.  For now, 1059-60, followed by
1055 are the supports to watch.  1056 breaking should be
sufficient to print a sell signal on the daily oscillators.  To
the upside, 1065 is now resistance.


20 day 30 minute chart of the ES


The 30 minute ES stopped on descending resistance-turned-support,
with the 30 minute cycle oscillator oversold.  As on the NQ, we
have a nearly perfect cycle juxtaposition on these two key
timeframes.  A move below 1052 would confirm lights out for the
bulls, with 1056 first downside support.  A break of 1056 is the
first test of today's selling, while a break above 1065 will
confirm a new 30 minute cycle upphase.  This latter starting from
the current higher low would be bullish.


150-tick ES


The 150 tick ES shows the short cycle oscillators oversold but
not yet finished their downphase.  Keltner support is projected
to 1055-6, which would line up with the 30 minute cycle target as
well.


Daily YM candles


The YM was stunningly strong all day, selling very reluctantly
and displaying a great susceptibility to bounce, with a new 52
week high printed at 9995 on the Dow's 10K print.  The daily
candle left a doji top but also bounced off the lows. The daily
cycle upphase barely hiccupped and is still in progress, the two
week uptrend still firmly intact.  Above 9840, the bulls still
have the ball.


20 day 30 minute chart of the YM


The bounce above descending bull flag trendline support resembles
that on the ES, but the move lacked bearish conviction.  Above
9890, I'll be expecting a bounce, but note that the 30 minute
cycle downphase still has plenty of room to run.  We'll find out
tomorrow whether the YM is merely lagging the weaker ES and NQ,
or whether it's hinting at underlying bullishness in the market.
If it bounces along with the NQ and ES from their 30 minute cycle
lows, then a retest of today's highs should be in the cards.

See you in the Futures Monitor!


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

Dow 10,000 and Fed's comments finds selling

Two benchmarks may have been achieved in today's session.  Bulls
certainly got their Dow 10,000 early in the session, while the
Fed's comments that that the probability of an unwelcome fall in
inflation has diminished in recent months may have marked an end
to fears of deflation.

And while the Dow Industrials (INDU) 9,923.42 -0.41% finished 41-
points lower on the session and gave back 79.70 points from its
10,003.12 morning high, it wasn't Dow 10,000 that saw sellers
show up, I think it has to be the Fed's talk that fears of
deflation have been put to rest, that triggered this afternoon's
selling.

Forgive me if I quote the Dow Industrials in decimal form, but
after seeing a Friday's bearish swing trade in the NASDAQ-100
Tracking Stocks (AMEX:QQQ) $34.43 -2.28% get stopped out at the
open (stop $35.45) with a session high tick of $34.46, and
eventually fall to a session low of $34.35, and well below the
bearish target of $34.66, my slight frustration has me quoting
things in decimal today.

While the Fed's initial statement is always brief
http://www.federalreserve.gov/boarddocs/press/monetary/2003/20031209/
there's always two sides of thought to just what the Fed is
actually saying.

Those that view things more optimistically found the Feds
observation that deflation has become less of a risk as a
positive (I view this as a positive), where some view the Fed's
comment that current policy accommodations can be maintained "for
a considerable time" as also being a positive for further
stimulus to the U.S. economy (I'm mixed 50/50 on this).

Those that are more cautious, view the Fed's bias toward keeping
rates low "for a considerable time" has the Fed saying it is
concerned that risks toward a weak economy are still present,
thus easy monetary policy is still needed (I'd agree to a point).

Today's market reaction to the FOMC statement is about as
divergent, or disagreeing as one could imagine.

Treasuries found selling on the Fed's comments, where I would
have to think the selling came from Treasury bond bulls that had
been holding Treasuries on thought of deflation still being a
larger concern to the Fed.  The benchmark 10-year YIELD ($TNX.X)
jumped 7.4 basis points to 4.352% in today's session.  While a
7.4 basis point move up or down is considered a pretty good move,
the 10-year YIELD rose 10.9 basis points from the 02:15 PM mark
and final 45-minute of trade.

Aha!  With deflation out of the way, and Treasuries seeing a sell
response, then inflation must be the more dominant part of the
Fed's comments.  While the February Gold futures contract (gc04g)
$408.90 +0.34 rose $1.40, the AMEX Gold Bugs Index ($HUI.X)
107.83 -2.87% found the equity side of gold seeing some selling.

In an attempt to truly offer an unbiased opinion, the AMEX Gold
Bugs (Index ($HUI.X) recently traded a 52-week high on December
2nd and trades above its shorter-term 21-day SMA of 236.63.  I'd
have to check my index symbols closely if looking at a chart of
the broader S&P 500 Index (SPX.X) 1,060.18 -0.85%, which recently
traded a 52-week high on December 3rd and trades above its
shorter-term 21-day SMA of 1,054.04.

My "unbiased" observation at this point is that gold stocks look
very similar (technically) to the broader S&P 500 in recent
weeks, and for me, it is difficult to confirm that the rise in
gold stocks, or the commodity itself, is spelling doom for the
broader markets.

As I tabulate much of today's trade, there was little on the
equity side of things that didn't see selling today.

U.S. Market Watch - 12/09/03 Close; FOMC Meeting



A lot of red or lower price action today.  Traders and investors
are welcomed, and encouraged, to bookmark the above for
historical reference and can be referred back to in coming weeks.
In RED ARROWS and PINK arrows I've marked some of the more
heavily distributed sectors over the past 5 trading sessions, and
have also added the last 20-day's % change.  BLUE ARROWS depict
those sectors that are showing more bullish price action over the
past 5-days.

One observation related to gold equities, and the non-weighted
AMEX Gold Bugs Index ($HUI.X) 242.22 -3.75% in relation to the
U.S. Dollar Index (dx00y) 88.49 -0.29% over the past 20-days is
nearly a 4 to 1 type of inverse relation to the dollar.  Still,
despite dollar weakness today, even gold stocks found selling.
For the better part of several months we've noted gold's strength
on dollar weakness, but today's selling most likely hints more of
blanket, or non-discriminate selling.

The Semiconductor Index (SOX.X), Disk Drive Index (DDX.X) and
Airline Index (XAL.X) are down nearly 10% in the past 5-days,
where 10% declines are often associated with "corrections."
However, it has not been uncommon to see 15% declines in the more
volatile technology sectors.

Just as the NASDAQ-100 Index (NDX.X) 1,383.66 -2.42% has been
lagging INDU/SPX/OEX strength, or leading weakness in recent
weeks, it would be an easy observation that semiconductors have
been the likely group of stocks weighing on the NASDAQ-100 Index.

One sector I did think held up surprisingly well was the Dow
Transportation Index (TRAN) 2,920.92 -0.29% today, which tries to
steady itself above a starting to round lower 21-day SMA of
2,916.12.  Sector component breadth was negative with 16 of the
19 components trading lower.  Gainers had ALEX +2.88%, BNI +1.5%
and CSX +0.05%, while bigger losers were the commercial airliners
and NWAC -3.66%, CAL -3.43%, AMR -1.88% and DAL -1.65%.

Aside from the focus given to the Fed's comments, today's biggest
story, which did have negative impact on the financials
(specifically banks) and the homebuilders was Washington Mutual's
(NYSE:WM) $39.97 -8.94% lowering of fiscal 2003 and 2004
guidance, due to a decline in mortgage originations, but also
greater competition in mortgage lending and intense competition
in the mortgage market.  What may be more company specific was WM
also noting that results would be hurt by the company's greater
emphasis on adjustable-rate mortgages.

While I can't say for certain, what could be happening to WM on
the adjustable rate side of things is that prior guidance given,
or projected, was based on declining Treasury YIELDS or falling
mortgage rates, where if looking at Treasury YIELDS in recent
months, they have been rather flat with the 10-year YIELD ranging
between 4.0% and 4.6%.

I have not had time to keep up on the Mortgage Banker's
Association weekly mortgage statistics lately, but will try to
set some time aside late tonight.

Market Snapshot / Internals - 12/09/03 close



Market internals on the advance/decline line were not nearly as
strong today as they were yesterday, especially for the NYSE.
Still, we see a rather notable lagging for the NASDAQ vs. the
NYSE in today's trade.  While both the NYSE and NASDAQ recorded a
greater number of new 52-week highs in today's session than
yesterday's, a greater number of new lows were also found, which
has the daily ratios (divide NH by sum of NH + NL) nearly
identical to yesterday.

With the NASDAQ showing greater technical weakness at this point,
and nearing it recent relative lows of November 21, I want to
quickly not tonight's 10-day NASDAQ NH/NL ratio of 95.0%, which
would still be in a "bear confirmed" reading for this indicator,
but up from its relative low reading of 90% found in late
November.  I'm make this note of some still bullish leadership as
the NASDAQ-100 Index (NDX.X) and its Tracking Stock (AMEX:QQQ)
now move into a recent gap higher from the late November relative
lows.  Often times, traders/investors will look for a stock or
index to "fill in" a gap that was created on a chart.

Before we look at the QQQ chart and make note of this gap, lets
quickly look at the Pivot Analysis Matrix.

Pivot Analysis Matrix -



The past couple of weeks, I have not been focusing too much on
the banks, or the S&P Banks Index (BIX.X) 329.94 -1.43%, as they
have been trading bullish, and somewhat in UNISON with the
SPX/OEX/INDU as it relates to their raw technicals.

However, my mindset right now is that NDX/QQQ is weakest, SPX/OEX
is stronger than NDX/QQQ.

It was my observation that late this summer, it was perhaps the
banks that really had the SPX/OEX breaking out of their summer
congestion.  Now there is some "bad news" in the sector, with
today's news out of Washington Mutual (WM).

With the NDX/QQQ leading weakness, not only technically, but in
the WEEKLY and MONTHLY pivot matrix (traded WEEKLY S1 before the
INDU/SPX/INDU) I think we need to monitor the BIX.X very close
right now as tomorrow, it shows THREE correlations for support at
the 327-328 level.  The reason I think we want to monitor the
BIX.X so closely is when we look at the MATRIX, you will see how
the BIX actually MIRRORS the NDX/QQQ in the MATRIX.

This may be an important observation, when we consider that
financials, account for roughly 28% of the weighting in the
SPX/OEX.

You see, I think just as the BIX.X and perhaps the financials
helped lead the SPX/OEX out of its summer consolidation to new
highs, today's news out of WM is some "bad news" that now
provides a very good test for the BIX.X.  Is the WM news stock
specific, or is it something that brings broader weakness to the
financials?  Right now I don't have the answer, and I'm not
certain anyone does, but with three levels of support showing up
near the 327-328 area at the MONTHLY S1 and WEEKLY S2, this is
what I would consider to be the lower end of a range, if a late-
December rally to cap off a very bullish year is to take place.

Now... with this in mind, lets look quickly at the QQQ, where
there isn't a bank in the bunch, but technology weakness is
notable, not only technically, but when comparing the NDX/QQQ
against the MONTHLY and WEEKLY pivot matrix levels.  We're also
going to look at that QQQ gap, and even bring in a past and not
too long-ago backfilling of a gap in the QQQ.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval Chart



For legal reasons, when I profile a stop, I don't budge from that
stop, and it was with some frustration that the QQQ traded a
penny above my Monday lowered stop of $35.45, which was also
today's (Tuesday) DAILY R1.  I (Jeff Bailey) then profiled a very
stupid day trade bullish trade at $34.97, stop $34.80, target
$35.35 and after slight bounce to $35.07, got stopped out.  This
bullish trade hints to me that the Q's may not see a rocket type
bounce as they did on October 24th, but may try and see a
consolidation low around the WEEKLY S2.  The trade for any
strength at this point would be above $35.10.  Believe me, the
Q's got pushed lower pretty quick when they came back to
challenge that level after I profiled the bullish trade long, and
this was 10-minutes after today's FOMC announcement.

S&P 500 Index (SPX.X) Chart - Daily Intervals



There was little program trading activity ahead of the FOMC
meeting today.  One sell program hit early, just as the INDU
crossed above 10,000, but I wouldn't say it was an overly "huge"
sell program, as the SPX tended to edge back to its WEEKLY pivot
and then make an mid-morning high of 1,068.  However, just after
the FOMC meeting the SPX bounced above 1,068.61 and "whack" the
program premium alerts really got active and when the SPX gave up
its WEEKLY Pivot and made a session low at 02:40 PM EST, that was
about it for any bullishness.  I've tried to envision the BIX.X
testing its WEEKLY S2 as the SPX tests its WEEKLY S1.  I've also
pointed to an approximation of where the QQQ traded in relation
to its WEEKLY S2/S1, with thought that QQQ may well trade its
WEEKLY S2 tomorrow, as SPX trades WEEKLY S1.

Now, with the BIX.X and financials making up approximately 28% of
the SPX, do you sense how the BIX.X's WEEKLY S2 becomes a rather
important support level, where if broken to the downside, could
then have the SPX further vulnerable to WEEKLY S2?  With NDX/QQQ
weak, the SPX really lack any type of bullish beta, and if the
financial begin to weaken and the SPX loses not only tech
bullishness, but financial bullishness, then weakness builds for
he SPX/OEX as well.

Dow Industrials Chart - Daily Intervals



As we look at the above charts and build observation of how the
major indices traded within the MATRIX, we can also see a similar
progression in the Stochastics.  The stronger Dow may be
vulnerable now to some "relief selling" after trading the 10,000
mark.  Stocks turning lower from overbought, and with correlative
DAILY S2 at the WEEKLY Pivot (remember, SPX/OEX below their
WEEKLY Pivots, NDX/QQQ below their WEEKLY S1) the INDU may be
vulnerable minimum to its WEEKLY Pivot.

Jeff Bailey


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

Fed Stays, Investors Don't
- J. Brown

The FOMC announcement tonight was upstaged by the DJIA touching
10,000 again for the first time since May 2002.  There was a
brief dip as traders did some profit taking but the INDU managed
to hold its gains until the Fed announcement.  The NASDAQ wasn't
so lucky.

Overall the feeling among professional traders is to hold on to
their gains through the end of the year.  That doesn't mean they
won't by the dip again but the DJIA has plenty of room before it
finds new support.

The NASDAQ looks a lot worse for wear.  The tech heavy index
dropped more than two percent and broke its simple 50-dma.
Furthermore, with the SOX also breaking down and the chips like
to lead the tech sector. I would expect the NASDAQ to test
support at 1880 again.  Looking at the daily chart we see a
strong bearish divergence in its MACD stretching back to
September.

This could be the dip we need to prep the markets for a Santa
Claus rally but that could just be wishful thinking.


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

Market Averages

DJIA ($INDU)

52-week High: 10003
52-week Low :  7197
Current     :  9923

Moving Averages:
(Simple)

 10-dma: 9863
 50-dma: 9735
200-dma: 9057

S&P 500 ($SPX)

52-week High: 1074
52-week Low :  768
Current     : 1060

Moving Averages:
(Simple)

 10-dma: 1063
 50-dma: 1045
200-dma:  973

Nasdaq-100 ($NDX)

52-week High: 1453
52-week Low :  795
Current     : 1383

Moving Averages:
(Simple)

 10-dma: 1419
 50-dma: 1403
200-dma: 1243


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

Given the drop in the major indices we're surprised that the
volatility indices didn't jump higher.

CBOE Market Volatility Index (VIX) = 17.63 +1.09
CBOE Mkt Volatility old VIX  (VXO) = 17.08 +0.77
Nasdaq Volatility Index (VXN)      = 28.32 +0.77


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.73        770,383       559,394
Equity Only    0.56        611,586       340,208
OEX            1.10         27,228        30,007
QQQ            1.45         34,499        50,011


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

Bullish Percent Data

           Current   Change   Status
NYSE          74.5    + 1     Bull Confirmed
NASDAQ-100    68.0    - 6     Bear Correction
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       81.2    - 1     Bull Confirmed
S&P 100       80.0    + 0     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: 1.33
10-dma: 1.13
21-dma: 1.17
55-dma: 1.15


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    1083       927
Decliners    1753      2174

New Highs     352       101
New Lows       13        12

Up Volume    509M      376M
Down Vol.   1217M     1385M

Total Vol.  1740M     1778M
M = millions


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

Commitments Of Traders Report: 12/02/03

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

Long and short interest continues to flat line from the
commercial traders.  Everyone seems to be waiting for the year
to end before changing their bets.  Small traders have grown
slightly more optimistic.


Commercials   Long      Short      Net     % Of OI
11/04/03      391,079   415,136   (24,057)   (3.0%)
11/11/03      389,965   415,259   (25,294)   (3.1%)
11/18/03      393,893   414,442   (20,549)   (2.5%)
12/02/03      394,531   414,223   (19,692)   (2.4%)

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
11/04/03      137,829    78,206    59,623    27.6%
11/11/03      136,072    74,249    61,823    29.4%
11/18/03      147,842    80,047    67,795    29.7%
12/02/03      154,788    85,776    69,012    28.7%

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

Wow!  We're actually seeing some action here in the e-minis.
Commercial traders have reversed from being net short to
net long.  This is bullish news.  Small traders have added
strongly to both their long and short positions and remain
bullish as well.


Commercials   Long      Short      Net     % Of OI
11/04/03      242,409   270,785    (28,376)  ( 5.5%)
11/11/03      249,864   258,503    ( 8,639)  ( 1.7%)
11/18/03      249,286   264,083    (14,797)  ( 2.9%)
12/02/03      283,199   268,833     14,366     2.6%

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
11/04/03      135,525    63,006    72,519    36.5%
11/11/03       94,649    51,815    42,834    29.2%
11/18/03       95,119    61,975    33,144    21.1%
12/02/03     119,555     77,609    41,946    21.3%

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


NASDAQ-100

Much like the large S&P contracts above, commercial traders
have fallen asleep.  There is very little change in positions.
Meanwhile, small traders have reduced positions on both
sides of the equation.


Commercials   Long      Short      Net     % of OI
11/04/03       34,159     48,293   (14,134) (17.1%)
11/11/03       35,889     49,201   (13,312) (15.6%)
11/18/03       35,608     49,689   (14,081) (16.5%)
12/02/03       35,569     48,552   (12,983) (15.4%)

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
11/04/03       24,132     9,703    14,429    42.6%
11/11/03       26,212    10,730    15,482    41.9%
11/18/03       32,034    10,356    21,678    51.3%
12/02/03       21,594     9,429    12,165    39.2%

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

The same story appears to hold true for DJ futures.  The
overall trend is flat with commercials slightly bullish
and small traders generally bearish.


Commercials   Long      Short      Net     % of OI
11/04/03       21,756    11,903    9,853      29.3%
11/11/03       20,209    11,660    8,549      26.8%
11/18/03       20,746    11,080    9,666      30.4%
12/02/03       21,128    12,379    8,749      26.1%

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
11/04/03        5,099     9,160   (4,061)   (28.5%)
11/11/03        6,105     8,201   (2,096)   (14.7%)
11/18/03        5,655     8,607   (2,952)   (20.7%)
12/02/03        6,667     9,302   (2,635)   (16.5%)

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                  Tuesday 12-09-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AMZN, PGR
Dropped Puts: None
Call Play Updates:
New Calls Plays: None
Put Play Updates:
New Put Plays:


****************
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:
*****

Amazon.com - AMZN - close: 49.34 chg: -1.74 stop: 48.99

Ouch!  The potential sell-off once the INDU hit 10,000 has begun.
Investors began taking profits and the Internets were prime
targets.  Shares of AMZN have broken support at $50.00 but have
not yet hit our target.  We're going to close the play now as
shares look set to hit the $48 level again.  A breakdown at 48
and the next support level is $45.

Picked on November 30 at $53.97
Change since picked:     - 4.63
Earnings Date          10/21/03 (confirmed)
Average Daily Volume:     10.7  million
Chart =


---

Progressive - PGR - close: 78.87 chg: -0.53 stop: 77.95

Given the general weakness today we don't feel like holding PGR.
The stock has indeed turned out decent relative strength and did
not see a lot of selling today but that could change if the
markets continue to slip.  The stock never got much momentum
going in its current up trend and we'd rather re-deploy capital
in something that's moving.

Picked on November 07 at $76.25
Change since picked:     + 2.62
Earnings Date          10/22/03 (confirmed)
Average Daily Volume:      654  thousand
Chart =



PUTS:
*****

None


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within the same firm. Licensed Option Principals Andrew Aronson
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option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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

C R Bard - BCR - close: 79.08 change: +0.37 stop: 74.99

It has been a strong couple of days for BCR.  The stock surged
higher on Monday and opened the play when it traded at $78.01.
Volume has been rising with price the last two sessions as well,
which is good news for the bulls.  Its technical indicators like
the MACD are looking stronger and it's impressive that BCR
managed to gain ground when the rest of the market pulled back
today.  Traders looking for new entries might want to wait for a
bounce from the $78 level, which should be new support.

Picked on December 08 at $78.01
Change since picked:     + 1.07
Earnings Date          10/15/03 (confirmed)
Average Daily Volume:      322  thousand
Chart =


---

Danaher Corp - DHR - close: 83.85 chg: -0.91 stop: 82.49

Shares of DHR followed the Dow's example and traded up to a new
high before falling back in profit taking.  Volume was pretty
strong today at more than a million shares.  The question now
that DHR has peaked near $85 is whether it will continue its up
trend.  The move looks suspiciously like a potential double-top
so we need to be cautious.  Traders looking for a new bullish
entry can choose between a bounce from $83 or a strong close back
over today's high.  Look for any news from DHR's annual
shareholder meeting tomorrow.

Picked on November 23 at $81.95
Change since picked:     + 1.90
Earnings Date          10/16/03 (confirmed)
Average Daily Volume:       829  thousand
Chart =


---

QLT Inc - QLTI - close: 18.92 chg: -0.63 stop: 16.99

Wow!  Shares of QLTI have turned in some volatility.  It has run
from $18.86 on Friday to $20.22 early this morning and back
again.  Volume was very strong at 1.7 million shares and that
sounds like distribution.  The big red candle today is another
cautionary sign.  We would be very cautious about new entries
until we see where the market chooses to find support.

Picked on December 07 at $18.86
Change since picked:     + 0.06
Earnings Date          10/23/03 (confirmed)
Average Daily Volume:      1.1  million
Chart =


---

United Tech. - UTX - cls: 88.49 chng: -0.06 stop: 87.25*new*

The DOW finally kissed the 10K mark this morning and our UTX play
helped lead the way with an early push up to challenge the $90
level.  But the sellers were lying in wait, knocking the DOW back
to close near its low of the day and UTX fell back in sympathy,
giving back all its intraday gains to end with a 6-cent loss.
UTX really didn't start to weaken until the post-FOMC selling got
underway and it is a credit to the stock's relative strength that
it managed to hold up as well as it did.  Of some concern is the
fact that the stock broke solidly above the midline of its rising
channel today, only to fall back and close below that measure of
resistance.  UTX has been finding solid intraday support for the
past week just below $87.50 and if the stock is to have any
chance of rallying to the top of its channel near $92, then this
support must hold.  We are not recommending new positions at this
time and are instead getting more aggressive with our stop,
raising it to $87.25 to at least lock in the majority of the
gains accrued to this point in the play.

Picked on November 23rd at   $83.90
Change since picked:          +4.59
Earnings Date               1/15/04 (unconfirmed)
Average Daily Volume =     1.84 mln
Chart =


---

Zimmer Holdings - ZMH - close: 65.87 chg: -1.04 stop: 64.49

Hold on to your seat belts.  ZMH has pulled back with the rest of
the markets today but has not broken support at $65.00 yet.  We
would not suggest new bullish positions at this time, especially
with the major indices susceptible to new selling.  Wait for
another bounce before evaluating new long positions.  There are
no new headlines for ZMH.

Picked on November 30 at $65.92
Change since picked:     - 0.05
Earnings Date          10/22/03 (confirmed)
Average Daily Volume:      1.8  million
Chart =



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

None


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

Avid Technology - AVID - cls: 46.60 chng: -3.23 stop: 51.00*new*

Look out below!  AVID offered up a really tasty entry point this
morning for those willing to take it before our official $47
trigger was hit.  The stock pushed up to kiss $50 resistance and
was firmly rejected right there at the converged 10-dma ($50.21)
and 20-dma ($50.45).  The stock quickly fell back from there,
finally satisfying our trigger during the lunch hour and then
closing right at its low of the day.   This represents a complete
break of the support that has been holding for the past several
weeks and with volume running nearly double the ADV, it looks
like the beginning of a solid breakdown.  There is potential
support near $45 and then again at $43, but we're viewing those
levels only as potential bounce points on the way to our $40
target.  Aggressive traders can consider new entries on a break
below today's low, while those looking for a more conservative
entry will want to target a failed bounce below $50 now that the
PnF chart has issued a fresh Sell signal with a tentative price
target of $38.  Lower stops to $51, which is just above today's
intraday high, as well as the 10-, 20-, 30- and 100-dmas.

Picked on December 7th at     $48.46
Change since picked:           -1.86
Earnings Date                1/15/04 (unconfirmed)
Average Daily Volume =         637 K
Chart =


---

Kohl's Corporation - KSS - cls: 45.45 chng: -0.76 stop:
48.00*new*

The bulls have made a couple of attempts in the past week to buy
support near $44-45 in shares of KSS, with each attempt meeting
with solid selling back at resistance near the 10-dma ($47.15).
Once again on Tuesday, the selling volume was strong, propelling
the stock down to close just off its intraday low.  Daily
Stochastics are just now making a short-cycle bearish reversal
and it looks like there is now room to press the stock further to
the downside.  We're not in favor of new breakdown entries due to
the proximity of our final profit target at $42, but successive
failed rebounds below the 10-dma still merit consideration for
aggressive traders.  We're once again ratcheting our stop down,
this time to $48, a level that should not be revisited under any
conditions other than a trend reversal.  If KSS does break below
the $44 support level, we are recommending exits near the $42
level, which was the site of the September-2001 low.

Picked on November 18th at   $48.75
Change since picked:          -3.30
Earnings Date                2/12/04 (unconfirmed)
Average Daily Volume =      4.34 mln
Chart =


---

Nucor Corp. - NUE - close: 51.69 change: -0.44 stop: 54.00

Investors haven't been able to decide what to do with NUE now
that the tariffs on steel imports have been lifted.  The stock
has been dancing around the $52 level, and it appears that this
former support level is starting to morph into resistance.  There
was a brief bounce attempt this morning, but sellers were waiting
and knocked NUE back from the $53 level and the stock then
consolidated for the remainder of the day below $52.  Repeated
bounce failures below that $53 resistance, now reinforced by the
10-dma ($52.92) can be used for fresh entries.  Because of the
way NUE rebounded so sharply from last week's breakdown under
support, caution must be exercised if considering new entries on
weakness.  Maintain stops at $54.

Picked on December 2nd at    $52.66
Change since picked:          -0.97
Earnings Date                1/22/04 (unconfirmed)
Average Daily Volume =         689 K
Chart =


---

Panera Bread Co. - PNRA - cls: 35.09 chng: +0.18 stop: 38.50

After last week's breakdown, shares of PNRA are valiantly trying
to hold support near $35, which was the site of solid resistance
early in the year.  Despite the weakness in the rest of the
market, the stock amazingly held its ground on Tuesday, actually
ending with a fractional gain.  Despite this impressive holding
action, there is clearly a lack of strength to support any rally
as demonstrated by the fleeting bounce to the $36 level early
this morning, followed by the drift lower to end near the low of
the day.  Failed bounces below the 10-dma (now at $36.91) will
provide the best entries into the play, while aggressive momentum
traders will need to see a volume-backed move below $34.50 before
adding new positions.  Maintain stops at $38.50, which is just
above the falling 20-dma ($38.46).

Picked on December 4th at     $36.50
Change since picked:           -1.41
Earnings Date                1/29/04 (unconfirmed)
Average Daily Volume =         766 K
Chart =


----

Thor Industries - THO - close: 55.10 chg: +1.28 stop: 56.01

Hmm...the relative strength today in THO is intriguing.  Shares
have filled the gap from Dec. 4th but closed under their 100-dma.
This could be a real bounce or it could be a bear flag pattern.
Currently, we remain UNTRIGGERED and until shares trade at or
below $51.99 we're just spectators.  More aggressive traders
might want to look for a failed rally under the $57 mark as
possible entries (emphasis on "failed" rally).

Picked on December 04 at $xx.xx
Change since picked:     + 0.00
Earnings Date          12/01/03 (confirmed)
Average Daily Volume:      236  thousand
Chart =



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

National Semiconductor - NSM - cls: 38.70 chng: -2.20 stop: 42.00

Company Description:
National Semiconductor Corporation designs, develops,
manufactures and markets an array of semiconductor products,
including a line of analog, mixed-signal and other integrated
circuits (ICs).  These products address a variety of markets and
applications, including amplifiers, personal computers, power
management, local and wide area networks (LANs and WANs), flat
panel and cathode ray tube displays and imaging and wireless
communications.  The Company's operations are organized in five
groups: the Analog Group, the Displays Group, the Information
Appliance and Wireless Group, the Wired Communications Group and
the Custom Solutions Group.

Why we like it:
It has been a rough week for the Semiconductor index (SOX.X), as
the group has given up its role of leading the NASDAQ higher and
has instead been seeing very heavy selling.  That pattern
continued on Tuesday, with a failed attempt to reclaim the $500
support level and then a straight down decline right into the end
of the day, that only picked up steam after the FOMC meeting
concluded.  NSM has been a bastion of relative strength for the
past several months, but that didn't protect the stock today, as
it led the SOX lower to shed 5.37%.  In the process, the $40
support level was shattered, as well as the 50-dma, also right at
$40.  An argument can be made for support near $38, but with the
major support break today, it looks like the stock still has room
to fall.  Once NSM prints $38, the PnF chart will give a fresh
Sell signal, with a tentative bearish price target of $30.  Below
$38, next support comes in near $36, but we're setting our sights
on $32, at the top of the early September gap.

It is worth noting that despite strong earnings results last
week, NSM was already looking weak, having broken below the 10-
20- and 30-dmas, all of which are converged near $42 and turning
down.  An additional sign of weakness is the fact that there is
bearish divergence on the daily MACD oscillator, with the recent
higher high in price being accompanied by a lower high in the
MACD.  This divergence is also seen on the daily RSI.
Conservative traders may want to wait for a trade under $38
before entering, but the best entry point appears to be a failed
rebound under the 50-dma.  If choosing the momentum entry
approach, watch the SOX carefully near the $475 support area to
make sure it is continuing to show weakness.  Our official target
will be $32, and we'll use an initial stop at $42.

Suggested Options:
Aggressive short-term traders can use the January 35 Put, while
those with a more conservative approach will want to use the
January 40 put.  Our preferred option is the January 40 strike,
as it provides more time until expiration.  While we've listed a
December strike, it is not the preferred strike due to the
proximity of December expiration.

! Alert - December options expire in less than two weeks!

BUY PUT DEC-40 NSM-XH OI=5977 at $2.10 SL=1.00
BUY PUT JAN-40*NSM-MH OI=2191 at $3.20 SL=1.50
BUY PUT JAN-35 NSM-MG OI= 798 at $1.05 SL=0.50

Annotated Chart of NSM:



Picked on December 9th at     $38.70
Change since picked:           +0.00
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      4.10 mln


---

XL Capital - XL - close: 72.60 change: -0.92 stop: 75.51

Company Description:
XL Capital Ltd, through its operating subsidiaries, is a leading
provider of insurance and reinsurance coverages and financial
products to industrial, commercial and professional service
firms, insurance companies, and other enterprises on a worldwide
basis. As of September 30, 2003, XL Capital Ltd had consolidated
assets of approximately $39.6 billion and consolidated
shareholders' equity of approximately $7.4 billion.  (source:
company press release)

Why We Like It:
It has been a rough couple of quarters for XL.  Shares have been
stuck in a downtrend since June.  Shares were hammered even
harder in mid-October when the company issued an earnings
warning.  The stock did manage to rebound back to the $75 level
and tried to fill the gap but was turned back by its simple 200-
dma.  The very next day XL warned again.  Estimates for 2004 had
been $9.28 a share.  Now they are 9.05 to 9.25.  Selling has
brought it back under its simple 50-dma and the stock looks
vulnerable to retest its lows near 67.50, especially with its
MACD rolling over back into a sell signal.  We're going to
initiate the play at current levels with a stop loss at 75.51.

Suggested Options
We like the January puts.  Our favorite is the January 75s.

BUY PUT JAN 75*XL-MO OI=1727 at $3.60 SL=1.80
BUY PUT JAN 70 XL-MN OI=3883 at $1.25 SL=0.65


Annotated Chart:



Picked on December 09 at $72.60
Change since picked:     + 0.00
Earnings Date          01/28/04 (unconfirmed)
Average Daily Volume:       1.2 million
Chart =



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The Option Investor Newsletter                  Tuesday 12-09-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - NSM


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

National Semiconductor - NSM - cls: 38.70 chng: -2.20 stop: 42.00

Company Description:
National Semiconductor Corporation designs, develops,
manufactures and markets an array of semiconductor products,
including a line of analog, mixed-signal and other integrated
circuits (ICs).  These products address a variety of markets and
applications, including amplifiers, personal computers, power
management, local and wide area networks (LANs and WANs), flat
panel and cathode ray tube displays and imaging and wireless
communications.  The Company's operations are organized in five
groups: the Analog Group, the Displays Group, the Information
Appliance and Wireless Group, the Wired Communications Group and
the Custom Solutions Group.

Why we like it:
It has been a rough week for the Semiconductor index (SOX.X), as
the group has given up its role of leading the NASDAQ higher and
has instead been seeing very heavy selling.  That pattern
continued on Tuesday, with a failed attempt to reclaim the $500
support level and then a straight down decline right into the end
of the day, that only picked up steam after the FOMC meeting
concluded.  NSM has been a bastion of relative strength for the
past several months, but that didn't protect the stock today, as
it led the SOX lower to shed 5.37%.  In the process, the $40
support level was shattered, as well as the 50-dma, also right at
$40.  An argument can be made for support near $38, but with the
major support break today, it looks like the stock still has room
to fall.  Once NSM prints $38, the PnF chart will give a fresh
Sell signal, with a tentative bearish price target of $30.  Below
$38, next support comes in near $36, but we're setting our sights
on $32, at the top of the early September gap.

It is worth noting that despite strong earnings results last
week, NSM was already looking weak, having broken below the 10-
20- and 30-dmas, all of which are converged near $42 and turning
down.  An additional sign of weakness is the fact that there is
bearish divergence on the daily MACD oscillator, with the recent
higher high in price being accompanied by a lower high in the
MACD.  This divergence is also seen on the daily RSI.
Conservative traders may want to wait for a trade under $38
before entering, but the best entry point appears to be a failed
rebound under the 50-dma.  If choosing the momentum entry
approach, watch the SOX carefully near the $475 support area to
make sure it is continuing to show weakness.  Our official target
will be $32, and we'll use an initial stop at $42.

Suggested Options:
Aggressive short-term traders can use the January 35 Put, while
those with a more conservative approach will want to use the
January 40 put.  Our preferred option is the January 40 strike,
as it provides more time until expiration.  While we've listed a
December strike, it is not the preferred strike due to the
proximity of December expiration.

! Alert - December options expire in less than two weeks!

BUY PUT DEC-40 NSM-XH OI=5977 at $2.10 SL=1.00
BUY PUT JAN-40*NSM-MH OI=2191 at $3.20 SL=1.50
BUY PUT JAN-35 NSM-MG OI= 798 at $1.05 SL=0.50

Annotated Chart of NSM:



Picked on December 9th at     $38.70
Change since picked:           +0.00
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      4.10 mln


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**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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