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Daily Newsletter, Sunday, 01/04/2004

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The Option Investor Newsletter                   Sunday 01-04-2004
Copyright 2004, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Happy New Year, I Think
Futures Market: Key Reversal Day
Index Trader Wrap: New Highs
Editor's Plays: So Far So Good
Market Sentiment: A Mild Hangover
Ask the Analyst: Dow Dogs barked loud in 2003
Coming Events: Earnings, Splits, Economic Events


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       WE 01-02        WE 12-26        WE 12-19        WE 12-12 
DOW    10409.85 + 85.18 10324.6 + 46.45 10278.2 +236.06 +179.48 
Nasdaq  2006.68 + 33.54 1973.14 + 22.12 1951.02 +  2.02 + 11.18  
S&P-100  549.99 +  7.21  542.78 +  2.52  540.26 +  8.48 +  8.27  
S&P-500 1108.48 + 12.21 1096.27 +  7.61 1088.66 + 14.52 + 12.64  
W5000  10777.86 +115.48 10662.4 + 82.96 10579.4 +114.94 +111.88  
RUT      560.85 +  5.75  555.10 +  8.22  546.88 -  0.71 +  8.58  
TRAN    3008.16 +  8.49 2999.67 + 12.24 2987.43 +  4.02 + 72.83  
VIX       18.22 +  0.83   17.39 +  0.97   16.42 +  0.01 -  0.68  
VXO       17.94 +  1.36   16.58 +  0.53   16.05 +  0.10 -  1.39  
VXN       24.51 +  0.56   23.95 -  0.94   24.89 -  0.97 -  1.19  
TRIN       1.01            0.79            1.02            1.02     
Put/Call   0.76            0.86            0.80            0.75     
******************************************************************

Happy New Year, I Think
by Jim Brown

The Dow surged at the open on Friday on relief that there 
were no terrorist events over the holiday. The first economic
present of the new year came in the form of the ISM report
and investors cheered once again while any shorts from 
before the holiday were squeezed out of the market. A
new year and already a new high. Happy New Year! 

Dow Chart

 
Nasdaq Chart

 


The ISM report lost no time in putting investor fears to rest
that the economy had softened in the fourth quarter. The index
rose to 66.2 from 62.8 and well over consensus estimates of
61.0 on the strength of surging new orders. This is the 
highest ISM since July 1950. New Orders surged to 77.6 from
73.7 and Employment rose to 55.5 from 51.0. This is the 2nd
month over 50 for employment after 38 months in decline. 
Orders were higher than production for the fourth straight
month. Only 10% of those surveyed saw a decline in production.
There was no bad news in this report and investors should have
breathed a huge sigh of relief. The questionable economics over
the last two weeks were suddenly history and the hope for a
fourth quarter earnings surprise began to firm.

The good news pushed the Dow to a new high at 10527 and a 
level not seen since March 2002. The Nasdaq soared to 2022
and a level not seen since January 2002. The excitement was
short lived and sellers started to appear around noon. The 
reasons were many and the end result was a Dow close -118
points below the highs for the day but still above the 
current psychological 10400 level. 

One of the reasons for the Dow decline was IBM. A Bear Stearns
analyst predicted IBM would miss its December quarter bookings
by as much as $2 billion. IBM had blessed a $14 billion estimate
in mid-October but the Bear analyst is now expecting only $12 
to $13 billion. IBM has not helped the situation with a refusal
to comment on the $14B estimate earlier this month with a 
"timing remains uncertain on various deals" dodge. IBM lost 
-$1.13 on Friday.

Russell Chart

 

Other big cap Dow stocks with large drops were MMM, PG
and WMT. The Dow finished with a -44 point loss while the 
Russell closed with a +4 point gain. If you remember we saw
a rotation out of small caps and into blue chips over the 
first three weeks of December as some fund managers shifted
assets into highly liquid issues. The funds benefited from 
the gains in the Santa rally and were positioned in the 
liquid issues if they decided to exit.

Apparently some did decide to exit early on Friday as shown 
by the index imbalances. Helping them decide to take the 
plunge was an almost constant news of flight cancellations 
somewhere on terrorist fears. 11 flights have been cancelled
in the last four days. The urge to hold 2003 profits over the
weekend with these kinds of fears proved too much for some
even on the positive ISM news. 

Also helping the decline was a worry that the spotlight is
now back on the Fed. With the prior Fed comments being based
on expectations for slow and steady growth the ISM spoiled
the outlook with the fastest growth in manufacturing in over
20 years. Bonds were hammered on the positive implications
and analysts were tripping all over themselves to raise GDP
estimates for the 4Q. The first look at the 4Q GDP will be
Jan-30. If the economy has suddenly gone from a sputtering
four cylinder to a purring V12 then the Fed's "considerable 
period" qualification may be in jeopardy. The head Fed is 
speaking on Saturday in San Diego on the U.S. economy and 
current monetary policy risk. The bond groupies will be all
ears. Fed funds futures were expecting a 25 point rate 
increase by July but that assessment could change very 
quickly based on his speech. The next Fed meeting is a 
two-day affair on Jan-27/28th. Conveniently two days before
the GDP report.  

Demonstrating the rate fears were the home builders which
took a serious hit. CTX -3.25, RYL -3.56, PHM -2.67, HOV
-4.16 and NVR -33.25 to name a few. Financial stocks also
took a hit on the worry about a rate change ahead. 

It is hard to draw any real conclusions for 2004 based on
one low volume day with lots of terror news. Friday was 
just a blip on the radar screen not a trend change. There
were some disturbing chart patterns but it was just one
day. The Dow may have broken 10525 but the important event
was the closing hold above 10400. This level has been 
support for the last three days and it remained support. 
This is key because institutions could have chosen to sell
in volume but didn't. Total volume across all exchanges 
was only 3.3 billion and it was 5:3 in favor of advancers
despite the negative finish on the Dow, S&P, OEX and 
Wilshire. The headlines do not always tell the story. 

The real story was the pullback to support with continued
terror fears. It could have been much worse but support
held. The wild card here is of course the light volume.
This was a retail day, not an institution day. Retail
traders were putting their year end bonuses to work and
buying stocks in the beaten down sectors. Drug stocks
soared after being ignored during the tech rally in the
fourth quarter. This could be a double-edged sword. Drugs
are defensive and the surge today could be seen as a move
into safety in advance of a potential January dip. 

Before I get into my outlook for next week I need to clear
up something. I got a couple emails over the last couple
weeks saying I was too bearish and I should not be telling
people the market will crash in January. Excuse me? I am
not trying to be bearish and I am not telling anybody the
market will crash in January. I apologize if it came across
that way but I guess one persons profit taking dip is a
crash for others. Secondly, I don't know if the market is
going to dip in January any more than anybody else does. 
I do expect it to dip based on historical trends. I do not
expect it to crash. Assign your own meanings to the terms
dip and crash based on my outlook below. I analyze the
market, compare it to current and historical trends and 
draw conclusions. I report these conclusions, good and 
bad, and explain my rationalism behind them. As an 
investor you should take these conclusions and compare 
them to your market view and make your own decisions. 
Finally, if I were bearish then my picks in the Top-50 
& Top-20 should reflect that. They are all long plays. 

My outlook for January is based on historical trends. 
Over the last six years those trends have been for a 
January high to be established in the first 3-5 days. 
This has been followed by a drop of between -550 and 
-1050 points over the next several weeks. Obviously a
drop of -550 points would barely break 10,000 and would
be insignificant to the current market. Hardly a crash.
Should the market reach the other extreme from the 10527
high on Friday it would push us right back to decent
support at 9500 and would still be less than a 10%
correction. Still no crash. So where does reality actually
lie? That correct answer today would be worth millions.
What would you do on Monday if you knew in advance that
the Dow would hit 9500 in two weeks? Unless you are Osama
and know of an impending attack that answer will remain
hypothetical. 

I will try to be as specific as possible with my current
outlook. The reasons for a profit taking dip remain the
best Dow year since 1996, best S&P since 1998 and third
best Nasdaq year in history. This does not even take into
consideration that the first three months of the year were
down. We recovered the earlier losses and rebounded to 
those gains after the March lows. There is considerable 
profit on the table and funds coming out of a bear market
need to show some gains and produce some new marketing
materials showing those gains. Up until Friday the good
economic news was priced into these gains. The December
ISM may have given them one more up leg or maybe not. The
worry about the Fed accelerating their rate schedule could
offset the ISM bounce. Funds also know that these profits
could go up in smoke in an instant if a major attack did
appear. Also, many "analysts" think the current market is
very overbought citing a current PE of 38 for the Nasdaq. 
In short there are plenty of reasons for some profit taking
ahead. 

Offsetting the potential for profit taking is the hope 
that the Jobs Report next Friday will be a blowout based
on the ISM gains. One more positive economic point for
the recovery and one more negative for the Fed if it came
to pass. Add in the lack of any serious earnings warnings
and very few warnings in general and the 4Q earnings 
appear to be on track to surprise to the upside. Factor in 
the coming $165 billion in first quarter tax stimulus and
the stars are aligned for a continued gains according to
the bulls. 

You can decide which scenario you like best and invest
accordingly. However, if recent January trends repeat the
Dow could easily test 9500 before January is over. Does
that mean I am bearish? No, it just means that historically
we could test 9500 before the end of January. I personally
think it will produce a significant buying opportunity for
2004. I think investors should consider it an opportunity
and not a dip or crash. 

Dow Chart - Weekly

 

To balance the scales today we need to look at the upside 
potential as well. The Dow has taken out resistance on
almost a daily basis for the last three weeks. Since 10,000
was broken the Dow has been on a constant upward march. The
last two days of December saw a plateau reached and held at
10400 and despite the intraday selling on Friday that level
still held. Moving up from here could be a problem. The 
10525 level reached on Friday is exactly the downtrend
resistance line from Jan-2000. There is even more significant
horizontal resistance at 10650 which was the high for all
of 2002. Were it not for the current very extended conditions
my outlook might be more positive but I believe we are going
to have a tough time moving above the 10650 level without
some profit taking first to create that next buying 
opportunity.

S&P Chart - Weekly

 

Wilshire 5000 - Weekly

 

Next week is full of economic reports but the only one that
really matters is the Jobs Report on Friday. We may get some
volatility on the others but it is only a prelude to the 
Friday report. What we are likely to see is simply a very 
volatile market in general as both the bulls and the bears 
are scared to commit to a position. Friday was a throw away
day with most fund managers on vacation after a long year. 
Next week is going to be a pivotal week as those managers 
come back to work to implement their plans for 2004. They 
will first have to wade through the inflow of year end 
retirement cash and decide how/when to put it to work. 
Index funds do not have that luxury. They receive cash and
spend it. Their goals are a lot different as they only have
to mimic the market and not time it. This year-end cash 
inflow to index funds normally provides the liquidity needed
to produce those early January highs. The hold at support 
on Friday could be the launch point for a Monday bounce. I 
am sure many retail traders could not bring themselves to 
go long on Friday with continuous newscasts about flight 
cancellations. If we make it to Monday with no event those
traders will breathe a sigh of relief and step up to the 
line if conditions are positive. I am sure you can see there
are a lot of "ifs" for next week and odds are good we could
move quickly in both directions.   

We will be sending our first Top-50 Stocks for 2004 
newsletter update on Monday night to everyone who signed
up for the special. We will update entry points, exit 
points and our outlook at regular intervals as each play 
progresses.

Sunday is the last day for the year-end renewal special. 
Because of the time critical nature of the Top-50 Stocks
for 2004 and the Top-20 Lottery Picks we have loaded the
CD to the web and we will send the link to anyone who
signs up on Sunday. We will follow up with the actual CD
by Priority Mail. We want you to be ready to take advantage
of any potential buying opportunity in our immediate future.
SUNDAY IS THE LAST DAY but anyone who signs up on Sunday 
will get the link by close of business on Monday. Don't
miss out on this opportunity to begin 2004 with a profitable
entry. https://secure.sungrp.com/04renewal/

Enter Very Passively, Exit Very Aggressively!

Jim Brown


*****************************
2003 Year End Renewal Special
*****************************  

TIMING IS CRITICAL! SUNDAY IS THE LAST DAY!

TOP 50 STOCKS for 2004 SPECIAL INVESTOR GUIDE

 


What better bonus could we give you than the 
potential to double or triple your money in 2004?


https://secure.sungrp.com/04renewal/


Sunday is the last day for the year-end renewal special. 
Because of the time critical nature of the Top-50 Stocks
for 2004 and the Top-20 Lottery Picks we have loaded the
CD to the web and we will send the link to anyone who
signs up on Sunday. We will follow up with the actual CD
by Priority Mail. We want you to be ready to take advantage
of any potential buying opportunity in our immediate future.
SUNDAY IS THE LAST DAY but anyone who signs up on Sunday 
will get the link by close of business on Monday. Don't
miss out on this opportunity to begin 2004 with a profitable
entry. https://secure.sungrp.com/04renewal/


**************
FUTURES MARKET
**************

Key Reversal Day
Jonathan Levinson

The first session of the New Year saw a relief rally take 
equities to new highs before failing to close in negative 
territory for key reversal day as defined by Murphy in "Technical 
Analysis of Financial Markets".  This bearish engulfing session 
sets up one of the more bearish setups but also one that we’ve 
seen fail on other occasions in 2003.  Gold miners and the CRB 
were firm while the US Dollar Index moved sideways below 
Wednesday’s closing levels. 


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


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


15 minute chart of the US Dollar Index


The US Dollar Index did not bounce Friday but it did not collapse 
either, distinguishing Friday from every other day this week.  
Rising support off Wednesday’s low is just below 86.60, but with 
the weekly trend down and given the speed and ferocity of the 
recent down spikes, I would tend to be very careful with bullish 
US Dollar Index plays (ie bearish foreign currency positions).  
The CRB gained 2.47 to close at 257.76, led by strength in wheat, 
lean hogs and corn.


Daily chart of February gold


I was unable to get quotes for gold Friday on the ECBOT, to which 
trading has been transferred, but Bloomberg reported it down 1.10 
to 416.10.  The XAU and HUI were positive throughout the session, 
holding up nicely against the decline in the broader equity 
markets.  The technical picture on gold has not changed this 
week, with the weekly cycles very extended to the upside but 
making new highs.  The weekly candle print, still within the 
tenacious bearish rising wedge, is a doji cross.  The light 
volume this week and the lack of sharp pullback makes it a 
difficult candle to characterize, as it’s either indicating 
distribution or consolidation at the highs- this uncertainty is 
born out by the upper and lower doji tails, with neither bulls 
nor bears willing to commit, price closing in the middle of the 
week’s range, just below multiyear highs.


Daily chart of the ten year note yield


The Fed drained on Friday, the first day this week that it did 
not add substantial amounts of intervention money via its open 
market operations.  Bonds got sold very hard, the worst day for 
ten year treasuries since October, with the yield adding 11.6 
basis points (a 2.72% gain) to close at 4.373%.  The move 
confirms the daily cycle upphase, and blew though all trendline 
resistance.  Bollinger resistance at 4.1% is the next resistance 
level to watch.


Daily NQ candles


The daily NQ broke to minor new 52 week highs at 1483 but dropped 
to Wednesday’s low before bouncing to close in shallow negative 
territory, up for the week.  Like the gold market, the NQ is 
looking extended but not yet on a sell signal, still within its 
daily cycle upphase.  Bollinger resistance suggests that upside 
should be limited within this daily cycle upphase, but we can’t 
know for certain until the next downphase has commenced.  The 
price trend has been rising and continues to do so, but after two 
weeks of solid advances, bears are betting on downside from here.  
With gains of the past two weeks on light volume, support is not 
as firm as it would otherwise be, but the absence of material bad 
geopolitical news and the persistence of 1460 support could fund 
a relief rally on Monday.   1460 is first support, followed by 
the 22 day EMA at Fibonacci support at 1440.


30 minute 20 day chart of the NQ


The 30 minute NQ launched a 30 minute downphase on a bearish 
oscillator divergence, and the result was a sharp sell spike that 
stopped at the day low of 1460.50.  Wednesday’s range was 
engulfed by the selling, but not on a closing basis, with NQ 
holding easily above 1460 support.  Rising trendline support was 
broken, but the broader trend is still positive, and it will be on 
even this short 30 minute timeframe until preliminary support 
at 1440-42 is broken. Resistance is at 1475, followed by 1482-3.

While it's tempting to view Friday's failure as a significant 
failure at The Top, it's simply not worth gambling on the failure 
of a well developed uptrend having occurred at X minute on X day.  
The safest approach is to buy support and sell resistance, and to 
heed the broader indicators.  With the VXO well above its recent 
sub-15 prints below but still extremely low at 17.94, long 
positions at support should only be attempted with tight stops.  
What the VXO, bullish percents and Investors Intelligence 
sentiment readings are telling us is that the bottom of a drop 
could be very far below us, but what price is and has been 
telling us is that it wants to go higher.  A bear would favor 
short trades at resistance, bulls can buy support.  In either 
case, in this low volatility environment, tight active stops are 
a necessity.


Daily ES candles


The ES closed lower by all of 1.75 but almost 10 point its day 
and 52 week high.  Rising channel trendline support held back the 
decline at 1103.50, just below 1105 support from last week.  The 
daily cycle oscillators grew yet more extended, Bollinger 
resistance was again tested, and the declines were again minor.  
Whether this spells washout or rally when the heavy volume 
returns to the market on Monday is anyone's guess.  Risk reward 
favors downside, price trend favors upside.  Seasonality is also 
a tossup, as traders may have been waiting to take capital gains 
on the 2003 rally. Support is at 1105, followed by 1094-96 below, 
resistance at 1112, followed by 1115 and 1118.


20 day 30 minute chart of the ES


The toppy but still rising daily cycle upphase caught some drag 
from the 30 minute cycle downphase, launching from a bearish 
divergence against the higher price highs.  Rising wedge support 
was broken by what looks and felt like an impulsive downside 
move.  The end of day stick-save took the shape of a bear wedge 
or pennant, what Linda refers to as a "b" distribution move, but 
with the short cycle oscillators trying to bounce and the 30 
minute oscillators closer to a trough than to a peak, there is 
sufficient evidence to justify a bounce on Monday.  Again, the 
market will tell us, and the support and resistance levels above 
are the ones to watch.


100-tick ES


A wavelet bounce (bottom panel oscillator) ended at the close, 
with the short cycles (prior 3 panels and red Keltner envelope) 
trying to assemble themselves into the next upphase.


Daily YM candles


Nothing to add on the YM, which bounced higher and dipped lower 
than its peers.  Support is at 10380 and 10360, resistance at 
10480 and 10500.


20 day 30 minute chart of the YM



As noted in my analysis of the NQ, the market is and has been 
tempting shorts with signs of imminent reversal and downside 
disaster for weeks.  I find the low volume, low volatility rise 
of the past 2 weeks combined with the possible deferral of cap 
gains until after year end to be the most compelling bearish 
story.  But, the market is going up, or rather has been going up, 
and the details aren't important from an account management 
perspective.  I have been urging traders to exercise caution and 
not to force their trades, and Monday is going to be an important 
application of that dictum.  The market is either going to go 
higher or lower, and support or resistance identified here could 
easily get steamrolled by a huge trending move.  Those levels are 
decision points, the most likely spots I see for at least a pause 
and possibly a reversal of the cycles I follow and trade.  If 
those levels fall, don't be a deer in the headlights of a 
trending move.  Let the stop take you out or reverse course.  We 
are there in the Futures and Market Monitors to follow what the 
markets are doing, in realtime.  See you there.


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

New Highs
Jonathan Levinson

Friday's decline left the indices with minor losses for the day 
and significant gains for the week, with the Dow dropping .4% or 
44 points for the day, closing at 10,409.85.  The SPX dropped .3% 
or 3.44 to close at 1108.48, while the Nasdaq added .2% or 3.31, 
closing at 2,006.68.  The failure at new 52 week highs on Friday 
left a gravestone doji rejection for the week, but given the 
positive closes for the week, the pattern is suspect.  The Dow is 
up .8% for the week, the SPX 1.1% and the Naz 1.7%.  For the 
year, it's 24.8%, 26% and 50.3% respectively.

The past week's gains took place on very light holiday volume, as 
did the previous week with abbreviated and closed sessions 
leaving holes in the charts.  As a result of the low volume, 
price swings were exaggerated and volatility actually rose from 
its subterranean lows of prior weeks even as the indices 
advanced.  Bonds got sold aggressively during the past week, as 
did the US Dollar Index, and the relief rallies for equities on 
the blessed absence of geopolitical disasters are nevertheless 
subject to intermarket uncertainty, as bulls and bears alike 
wonder how long an equity rally will be able to run in a rising 
rate/ declining dollar environment.

That said, there were powerful incentives for the markets to sell 
off during the past week, but the bulls were unshakeable, 
resisting the threat of terror attacks, mad cow outbreaks, the 
massive failure of Parmalat and the subsidiary fallout in bonds 
and derivatives for US lenders and investors, and fat bullish 
profits waiting to be taken.


Weekly COMPX candles


The Nasdaq rose along the lower wedge trendline, closing right on 
it but regaining a foothold after the previous week's close below 
it.  The failure at now downsloping Bollinger resistance of 2030 
is certainly not bullish, but the bounce of the past month has 
left preliminary buy signals on the ambiguous, bearishly 
divergent weekly cycle oscillators.  If next week is positive, I 
expect the weekly cycles to give us a clear (for a change) buy 
signal and likely abort the bearish divergences in place since 
the summer.

Once again, 1980 is a key support level, and while the 
oscillators are toppy, support has been firm and the uptrend 
persistent even for the Nasdaq.


Weekly INDU candles


The Nasdaq has kindasorta advanced for the past month, the Dow 
has been on a tear to the upside, cranking out a new 52 week high 
Friday above 10500.  While that level failed to hold, it's 
nevertheless a monumental level given the sub-7300 print last 
March.  While Prophetcharts displays this week's candle in red, 
it was nevertheless a .8% gain over last week.  The weekly cycle 
oscillators are on buy signals, in an upphase within overbought 
territory, and while a correction was due today, it will continue 
to look corrective until the uptrend has been violated.  I would 
want to see a move below 9600 before declaring the 2003 bull 
anything more than tired.  Trendline support and price confluence 
at 9900 come first.


Daily OEX candles


The chart of the OEX since the November low is a sight to behold.  
Friday's decline of .79 or .14% nevertheless represented a 
marginal key outside reversal day, but did nothing more than 
validate the upper rising channel trendline.  The uptrending 
daily cycle oscillators are very extended, and the odds favor a 
correction which may well have begun on Friday, but we won't know 
until the oscillators are pointed south.  Support at 546 is the 
next target on the daily candles.


20 day 30 minute chart of the OEX


The 30 minute chart shows a bearish stochastic divergence and the 
ensuing drop.  The 30 minute cycle oscillators are in a solid 
downphase, and given how toppy the daily cycle oscillators have 
become, a high-volume selling spree on Monday could be sufficient 
to kick off the daily cycle downphase discussed above.  That 
said, the OEX closed right above confluence support at 548, and 
until that level is broken, the uptrend remains substantially 
intact.  Below 548 comes support at 542-44.


Daily QQQ candles


QQQ printed a bearish engulfing candle, engulfing Wednesday's 
print which had engulfed Tuesday's print.  The absence of a 
significant drop following each of these outside reversals is 
impressive, and should be seen as a warning to bears.  However, 
the fact that such has occurred during a daily cycle upphase is 
not bullish and could indicate that move is waning.

QQQ failed at 36.79, dropping .06 net for the day.  As on the 
OEX, the daily trend is still up, and while there's more upside 
room on the QQQ's daily upphase, the price action shows 
hesitation here at the highs.  36 had been strong resistance on 
the way up, and it should now provide strong support below.  
36.60 is trendline resistance.


20 day 30 minute chart of the QQQ


As on the 30 minute OEX, the 30 min QQQ is in a downphase that 
has so far delivered strong price traction to the downside, 
launching from a bearish Macd divergence.  Confluence at 36.20 is 
first support, followed by 35.8-36.  I expect that the 30 minute 
oscillators will be oversold and ready to bounce by 35.80, and if 
they do, the ensuing upphase will tell us a great deal about the 
rally-  a lower price high will signal trouble, while a higher 
high will cause the daily cycle to begin trending in overbought.  
On the other hand, if 35.80 does not hold, then the daily cycle 
upphase should abort, and the bears will have the ball. 

As discussed in the Futures Wrap, Monday's return of high volume 
trading constitutes a wildcard, and I urge traders to remain 
limber, and to keep their stops in place.  The market will tell 
us which direction it wants, and our job is to follow it, not 
to force.  See you on Monday.


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**************
Editor's Plays
**************

So Far So Good 

We are currently in a laddered DJX put play that we began on
Sunday 12/21. The Dow was at 10278 at the time and the plan
was to buy Feb-100 DJX puts at 103.00, 103.50, 104.00. I only
wish I had been optimistic enough to add a 104.50, 105.00. 

If you filled the orders according to the schedule your
position should look like this:

3 contracts DJV-NV at 103.00 for $1.50 each
2 contracts DJV-NV at 103.50 for $1.30 each
2 contracts DJV-NV at 104.00 for $1.05 each

Average cost for seven contracts $1.31 each.

We had another entry scheduled at 102.50 that was not triggered.

CANCEL THAT ENTRY. 

Instead buy three more contracts at Monday's open for an
estimated $1.00 to finish the position. 

This will give us an average cost of $1.21 for 10 contracts. 

The target exit for this play is Dow 9700. 

I know it is optimistic given the extreme levels the Dow has
reached last week. Who would have thought we would see a spike
to 10527? 

A drop from Friday's close of 10409 to 9700 is only -6.8%
and well within the "normal" range of a profit taking dip.
Especially a January profit taking dip. 

There is no stop loss on this play. With very strong resistance
at 10525 and again at 10650 and the historical January dip
potential I am going for broke on this one. We have a $1200 
exposure with a potential target price around $3500. To just
breakeven the Dow would only need to drop to 10200 or below.
If you are squeamish about the exit set a stop loss once the
10300 level is broken. Exit for a loss at any point above 
10500 if desired. Personally I would add more above 10500.

I like this trade and I think we have an excellent chance
of success. If you were not in it I would not hesitate to
jump in next week. 

DJX Chart - Daily

  
  


********************************   

Play Recaps

Priceline.com (PCLN) Put play $18.78

http://members.OptionInvestor.com/editorplays/edply_121403_1.asp


Powerball 

End of the line

The Nasdaq rebound to a new high has not helped recover any
of the profit we lost over the last four weeks. Once the 
small cap techs began losing ground our fate was sealed.
The remaining time premium faded quickly and we are lucky
to escape with the 36% profit shown below. 

Considering just four weeks ago we were at 95% profit it is
even more frustrating. The original concept was to buy leaps
last January and hold them for a year while knowing that some
would do well and others would not.  

The small cap decline in December killed the play and I 
should have closed it then. I, like most optimists, hoped 
we would get a late December rally that would reflate the 
options. Unfortunately several of our stocks reported less
than expected guidance and were quickly punished. 

I am ending it for the record as of Friday's close. Still 
profitable but well off the highs. I posted the chart from
the Nov-28th high for comparison.         

I know many of you actually bought the portfolio in March
when I discussed a second portfolio and you are much higher
than the results shown below. Congratulations. 

The Top-20 Lottery plays in the end of year renewal special
are quite different this year. We are buying each one at a
specific entry point on the expected January dip. If they
do not hit our entry point we will not play. They are also 
only 4-5 month options (April-May) and I am planning on
getting out of them on April-15th. Shorter fuse, no summer
slump and much clearer crystal ball. 
 
It would have taken $1,255 to buy one contract of each on 
January-2nd. Any bets on what this will be worth on 12/31/03 

Powerball Chart 

  

The profit high of $1175 was hit on Friday November 28th.

 
********************    

Remember, these are high risk plays and should only be made
with risk capital.

Good Luck

Jim Brown  


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

A Mild Hangover
- J. Brown

U.S. stock indices opened 2004 with a mild hangover from the New 
Year holidays as prices trended flat to down by Friday's close.  
Any traders not taking a holiday of their own were probably 
surprised that the extremely positive ISM manufacturing numbers 
didn't spark a stronger bullish response.  The December ISM 
report unveiled the economy's factories are humming with a 
reading at 66.2. This is the highest level since December 1983.  
Most of you already know that any reading above 50 represents 
expansion and December report was the sixth month in a row to 
show economic expansion for the manufacturing sector.  

Despite the lackluster closing numbers the market internals were 
bullish on Friday.  Advancers outpaced decliners 15 to 13 on the 
NYSE and 18 to 12 on the NASDAQ.  Up volume outweighed down 
volume on both exchanges and strongly so on the NASDAQ.  

Traditionally the first several days of January are bullish but 
the market's been in need of a pull back for weeks now.  It's 
going to be an interesting tug-of-war, especially with a week 
full of economic reports.  Monday will bring the vehicle and 
truck sales numbers for December as well as the construction 
spending numbers.  Factory orders and the ISM services index, 
probably the most important report of the week, will come out on 
Tuesday.  There is a flurry of reports on Thursday and Friday but 
the most significant one should be the unemployment numbers.

Overall I think investors are excited but cautious especially as 
we approach the up coming earnings season.  Tread carefully.


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

Market Averages

DJIA ($INDU)

52-week High: 10527
52-week Low :  7416
Current     : 10409

Moving Averages:
(Simple)

 10-dma: 10357
 50-dma:  9922
200-dma:  9250



S&P 500 ($SPX)

52-week High: 1118
52-week Low :  788
Current     : 1108

Moving Averages:
(Simple)

 10-dma: 1099
 50-dma: 1062
200-dma:  993



Nasdaq-100 ($NDX)

52-week High: 1479
52-week Low :  795
Current     : 1463

Moving Averages:
(Simple)

 10-dma: 1449
 50-dma: 1417
200-dma: 1277



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

Wow! We're starting to see some big moves in the volatility 
indices.  The VXO (old VIX) surged 6% and looks ready to move 
higher.  The VIX looks ready to follow suit and the VXN is 
still stuck near its lows.

CBOE Market Volatility Index (VIX) =  18.65 +0.34
CBOE Mkt Volatility old VIX  (VXO) =  18.59 +1.08
Nasdaq Volatility Index (VXN)      =  24.83 +0.34


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.75        650,305       490,925
Equity Only    1.89        545,682       288,114
OEX            1.38         21,680        29,874
QQQ            3.97         18,242        72,438


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

Bullish Percent Data

           Current   Change   Status
NYSE          76.7    + 1     Bull Confirmed
NASDAQ-100    73.0    + 3     Bear Correction
Dow Indust.   86.6    + 7     Bull Confirmed
S&P 500       84.0    + 1     Bull Confirmed
S&P 100       84.0    + 2     Bull Confirmed


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: 0.82
10-dma: 0.88
21-dma: 1.01
55-dma: 1.07


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    1515      1821
Decliners    1293      1225

New Highs     367       202
New Lows       16         2

Up Volume    790M     1147M
Down Vol.    620M      404M

Total Vol.  1440M     1574M
M = millions


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

Commitments Of Traders Report: 12/22/03

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

Was it a one-week blip?  The surge in long positions by 
commercial traders have evaporated.  Was a sudden change of
heart or did they just get caught up in the holiday spirit?
Of course there was an equally strong disappearing act in
commercial short positions so maybe they're just confused.
Small traders have really cut back on their shorts and in
effect become extremely bullish.


Commercials   Long      Short      Net     % Of OI
12/02/03      394,531   414,223    19,692     2.4%
12/09/03      396,882   420,859    23,977     2.9%
12/16/03      448,103   460,670    12,567     1.4%
12/22/03      400,066   405,240    (5,174)   (0.6%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03
 
Small Traders Long      Short      Net     % of OI
12/02/03      154,788    85,776    69,012    28.7%
12/09/03      172,178    99,484    72,694    26.8%
12/16/03      172,947   113,704    59,243    20.7%
12/22/03      147,537    81,596    65,941    28.8%

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!  The disappearing act in the full contracts (above)
is nothing compared to the drop in contracts below.  Commercial
traders really reduced their outstanding long positions in the
e-mini's and that's not a bullish development. Right on cue,
the small traders cut back on their short positions.


Commercials   Long      Short      Net     % Of OI 
12/02/03      283,199   268,833     14,366     2.6%
12/09/03      294,006   288,385      5,621     1.0%
12/16/03      330,273   361,316    (31,043)   (4.5%)
12/22/03      128,801   213,021    (84,220)  (24.6%)

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
12/02/03     119,555     77,609    41,946    21.3%
12/09/03     142,173     76,171    66,002    30.2%
12/16/03     177,193     73,694   103,499    41.3%
12/22/03     125,248     43,482    81,766    48.5%

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


NASDAQ-100

We see the same contract evaporation in the NDX futures as well.
Commercial long contracts lost 1/3 of their number but short
contracts were cut in half.  That actually sounds bullish.  


Commercials   Long      Short      Net     % of OI 
12/02/03       35,569     48,552   (12,983) (15.4%)
12/09/03       39,612     51,443   (11,831) (13.0%)
12/16/03       61,343     73,153   (11,810) ( 8.8%)
12/22/03       40,277     36,452     3,825    5.0%

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
12/02/03       21,594     9,429    12,165    39.2%
12/09/03       25,842    10,228    15,614    43.3%
12/16/03       28,676    15,197    13,479    30.7%
12/22/03       22,656    14,544     8,112    21.8%

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

This time it is the small traders that drastically reduced
their short contracts.  They probably got tired of losing 
money.  Commercials followed suit.


Commercials   Long      Short      Net     % of OI
12/02/03       21,128    12,379    8,749      26.1%
12/09/03       20,378    11,934    8,444      26.1%
12/16/03       23,509    13,880    9,629      25.8%
12/22/03       14,088     9,998    4,090      17.0%

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
12/02/03        6,667     9,302   (2,635)   (16.5%)
12/09/03        6,858    12,006   (5,148)   (27.3%)
12/16/03        9,497    19,633  (10,136)   (34.8%)
12/22/03        6,915     8,983  ( 2,068)   (13.0%)

Most bearish reading of the year: (10,136) - 12/16/03
Most bullish reading of the year:   8,523  -  8/26/03

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


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***************

Dow Dogs barked loud in 2003

Will you be doing another update on the Dow Dogs for 2004?  I 
profited immensely from that article this past year and would 
like to implement this strategy again in 2004.  I'd also like to 
know what you think about the strategy of buying the 5 worst 
performing stocks and a different strategy I hear about on CNBC?

This year, the Dow Dogs barked loud, but the "big dogs" or the 5 
higher priced of the 10 Dow Dogs barked louder than the "smaller 
dogs." If you thought cats just meowed, then think again as 
Caterpillar's (NYSE:CAT) 81.58% rise had "the CAT" beating out 
the pack for this year's best performing dog.

2003 Dow Dogs Portfolio - Approx. $10,000 investment

 

I set up a hypothetical Dow Dog portfolio last year (round 
shares, with approx. $1,000.00 for each stock), and here's the 
final tally (excluding dividends) of how the Dow Dogs performed 
in 2003.  The Subtotal(s) and Total does not include dividends, 
commissions, or taxes.

For those of you not familiar with the Dow Dog strategy, it is a 
simple investment strategy based on the 10 highest dividend-
yielding stocks from the 30 Dow Industrials components, and is 
considered by many market theorists to be a value oriented 
investment strategy.

I separated the portfolio into the "little dogs" and "big dogs," 
where the "little dogs" are determined by simply identifying the 
5 lower priced of the 10 highest dividend yielding Dow Dogs.

While the above portfolio I set up was not equally weighted in 
dollar investment for each stock (would create fractional 
shares).

Dogsofthedow.com reports that an equally weighted dollar amount 
in each of this past year's 10 Dow dogs would have found a 23.6% 
net gain, with the "small dogs" gaining 18.7%.  The Dow 30 stocks 
gained 28.7%, while the Dow Jones Industrial Average (INDU), 
which is a price-weighted index, would have gained 25.3% in 2003. 
(Does not include dividends, commissions, or taxes).  

When 2003's trade began, the average yield of the 10 Dow dogs was 
4.2%, and ended this year with a 3.35% average dividend yield.  
The "small dogs" began the year with an average yield of 3.75%, 
and ended the year with a 3.60% average yield.  The Dow 
Industrials Average (INDU) started the year with a 2.47% average 
yield, and finished 2003 with an average yield of 2.12%.

One of this past year's (2003) biggest disappointments for the 
Dow Dogs was Eastman Kodak (NYSE:EK), which not only fell 26.74% 
on the year, but also told shareholders in 2003 that it was 
cutting its annual dividend from $1.80 per share, to $0.50.  

Who let that dog out?  Woof!...Woof.......Woof!... Woof!

Here's a recent 7-year history of how the 10 Dow Dogs, the 5 
smaller dogs, the Dow Industrials Average (INDU), S&P 500 Index 
(SPX.X) and the Fidelity Magellan mutual fund have performed in 
each of the last 7 years, and the average gain over the past 
seven years. (Does not included dividends, commissions, or 
taxes).

Dow Dog Strategy Comparison - Last 7 years

 

I've highlighted in BLUE those "investments" that outperformed n 
one particular year, and highlighted in RED, the "investment" 
that under performed in a particular year.

I'm limited by horizontal spacing and couldn't show other prior 
years of day, but I'm noticing some very SIMILAR percentage gains 
from 1997 and recently completed 2003.

I was surprised to see that in 1996, the 10 Dow Dogs gained 24.5% 
(12/31/95 average yield 3.35%), the "small dogs" gained 22.8% 
(12/31/95 average yield 2.47%), while the Dow Industrials Average 
(INDU) gained 26.0% (12/31/95 average yield 2.28%).

Is the Dow Dog strategy for you?  Is this market doomed for a 
fall?  Some market strategists (me included) feel 2004 could be 
another banner year for stocks, and perhaps the Dow Dogs 
strategy, based solely on dividend yield is poised to perform 
well.

Recent tax legislation brought about by President Bush has had 
company's raising their dividends, while the lowering of tax 
rates for individuals may also have dividend paying stocks 
holding favor in 2004.

I posted the 1995 average yields as a relative yield comparison 
benchmark for the following statistics.

For 2004, based on the 12/31/2003 closing price values and 
current declared annual dividends, the Dow Dogs have an average 
dividend yield of 3.61%, which compares favorably to that found 
on 12/31/95.  The small dogs, based on the 12/31/2003 closing 
price values and current declared annual dividends, have an 
average dividend yield of 3.64%, which also compares favorably to 
12/31/95.

Here's a look at how each of the Dow Industrials components 
performed this past year (2003), where I've sorted the small dogs 
to the top (lowest priced of 10 highest dividend yielding) and 
then the 5 big dogs, which round out the Dow Dog strategy.

Dow Components - 2003 end of year tabulation

 

This year's small dogs are T, SBC, GE, JPM and XOM, and the big 
dogs, which round out the Dow Dog portfolio are DD, MRK, C, GM 
and MO.

Merck (NYSE:MRK) and Citigroup (NYSE:C) are new entrants for the 
2004 list of Dow Dogs, while Caterpillars (NYSE:CAT) jump in 
price relative to annual dividend has it dividend yield not 
sufficient for the Dow Dog strategy.  Despite Eastman Kodak's 
(NYSE:EK) price declines in 2003, the company's decision to cut 
its annual dividend also finds its dividend yield insufficient to 
qualify as a Dow Dog.

As you can see, 25 of the 30 Dow components found gains this 
year.

Not unlike the trader/investor that asked today's question, I too 
heard a Dow theorist on CNBC discussing his research on how his 
research showed that over time, the purchasing of the 5 worst 
performing stock for a prior year tended to outperform the 
following year.  

I scrambled to catch the stocks he named for his top 5 Dow picks, 
but did catch EK, T, MRK and SBC.  He may have also mentioned 
JNJ, but I can't say for sure, as I only have 4 written down.  
However, looking at 2003's list of Dow decliners, JNJ may well 
have been the other stock mentioned.

You know me, and I tend to shy away from trying to pick a bottom 
in a stock.  I am not familiar enough with the strategy of buying 
the worst performing of the Dow stocks, with thought that they 
would rise back higher.  But I suspect it may also be a value-
based strategy that plays on investor psychology and the thought 
that a Dow component is a quality stock that will rebound back 
with its peers.

You watch.  Eastman Kodak (EK) will be this year's best 
performing Dow component, but I (Jeff Bailey) would be a little 
hesitant of the stock right now.  The company is currently in a 
major restructuring of its business focus, and the decision to 
cuts it dividend, may have investors shying away from the stock 
until more clarity is provided as to how the company's 
restructuring is going.

As such, I've dashed-red Wal-Mart (NYSE:WMT) and Microsoft 
(NASDAQ:MSFT) as two other under performers for 2003, where an 
investor interested in trying the investment strategy of buying 
an under performing 2003 Dow component might find as a suitable 
replacement for Eastman Kodak (NYSE:EK).

Dow Dog theory is based entirely on the 10 highest dividend 
yielding stocks, while a narrower strategy in the small dogs is 
narrowed to investor psychology, where it is thought that 
investors tend to buy lower priced stocks.

For example, give the average investor two different stocks from 
which to choose from, but with equal dividend yield, and investor 
psychology would have the investor preferring to buy the $25 
stock over the $50 stock, simply because "value" is perceived in 
the $25 as its price is "cheaper."  This psychology is then 
thought to create greater demand for the $25 stock, and have it 
price outperforming the $50 stock.

Well.... as you can see from some of the data presented above, 
this isn't necessarily the case over the past 7 years is it?

The Dow Dog strategy is VERY popular among LEAPs option 
investors, where a smaller amount of capital can be exposed to 
the strategy, but the smaller amount of capital required for an 
option, allows for greater diversification across a 10-stock 
strategy.

I would STRONGLY suggest that a stock investor, understand the 
need for protective stops in a Dow Dog theory, where the general 
investment rule is to allow for a 10% stop loss.

The advantage for a LEAPs option investor is that a stop in the 
option is not required, as long as the investor does NOT 
OVERLEVERAGE in the option contract.

An EXCELLENT example of how OPTIONS can be utilized, if an 
options trader/investor knows how to trade an option, is this 
year's trade action in Caterpillar (NYSE:CAT).

When Caterpillar (CAT) opened for trading on January 2nd it 
opened for trading at $45.95.  A stock investor may have bought 
100 shares of the stock at the open of trading for $44.95, and 
placed a 10% stop under the stock.  While CAT didn't trade 10% 
lower, or to a 10% stop of $40.45, it came close on February 
13th, when it traded a low of $41.24.  After seeing what happened 
to some stock investors in 2001 and 2002, an investor may have 
sold CAT, without giving it the 10% room to the stop.

However, a LEAPs option investor that bought 1 CAT $45 January 
2004 LEAPs option for $2.70 per contract (I checked and option 
traded a high of $2.70 that day) would have risked $270.00 
(excluding commissions), but bought a years worth of time for one 
of his/her Dow Dogs to perform.  

True, this is the EXTREME case for a stock that did VERY well, 
but you can perhaps see how an investor with approximately $2,700 
and really begin to diversify themselves in a Dow Dogs Strategy, 
where it may take just one or two of the Dogs to pay off rather 
nicely.

The downside to the LEAPs strategy, is that the LEAPs investor 
does not receive the stock's dividend.

Well.... I'm running late on getting this to print.

I'll put together another Dow Dogs portfolio like the one I did 
for 2003, and we'll check in on the Dow Dogs from time to time to 
see how they're doing.

Jeff Bailey


*************
COMING EVENTS
*************

-----------------
Earnings Calendar
-----------------

Symbol  Co               Date           Comment      EPS Est

------------------------- MONDAY -------------------------------

SONC   Sonic Corp.           Mon, Jan 05  After the Bell      0.30
WAG    Walgreen              Mon, Jan 05  -----N/A-----       0.25


------------------------- TUESDAY ------------------------------

STZ    Constellation Brands  Tue, Jan 06  After the Bell      0.79


------------------------ WEDNESDAY -----------------------------

MON    Monsanto Company      Wed, Jan 07  Before the Bell     0.01
RI     Ruby Tuesday          Wed, Jan 07  After the Bell      0.33
SDX    Sodexho Alliance S.A. Wed, Jan 07  Before the Bell      N/A


------------------------- THUSDAY -----------------------------

AA     ALCOA Inc             Thu, Jan 08  After the Bell      0.34
EMMS   Emmis Communications  Thu, Jan 08  Before the Bell     0.14
INFY   Infosys Tech LTD      Thu, Jan 08  After the Bell      0.51
LNR    LNR Property          Thu, Jan 08  Before the Bell     0.80
MSM    MSC Industrial Direct Thu, Jan 08  -----N/A-----       0.22
RPM    RPM International Inc Thu, Jan 08  After the Bell      0.29


------------------------- FRIDAY -------------------------------

None


----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------

Symbol  Co Name              Ratio    Payable     Executable

ACET    Aceto Corporation         3:2      Jan   2nd   Jan   5th
AAP     Advance Auto Parts Inc    3:2      Jan   2nd   Jan   5th
JCI     Johnson Controls, Inc     2:1      Jan   2nd   Jan   5th
CLBK    Commercial Bankshares Inc 5:4      Jan   2nd   Jan   5th
NRGY    Inergy GP, LLC            2:1      Jan  12th   Jan  13th
HRBT    Hudson River Bancorp, Inc 2:1      Jan  15th   Jan  16th
TARR    Tarragon Realty Investors 5:4      Jan  15th   Jan  16th
FRK     Florida Rock Industries   3:2      Jan  16th   Jan  19th


--------------------------
Economic Reports This Week
--------------------------

The first full week of 2004 is full of economic reports.  Vehicle
sales on Monday, ISM on Tuesday, Same-store sales on Thursday and
that's just a few on the list.  Plus, investors will be preparing
for the next earnings season.


==============================================================
                       -For-           

----------------
Monday, 01/05/04
----------------
Auto Sales (NA)            Dec  Forecast:    5.7M  Previous:     5.6M
Truck Sales (NA)           Dec  Forecast:    8.0M  Previous:     7.8M
Construction Spnding(DM)   Nov  Forecast:    0.5%  Previous:     0.9%


-----------------
Tuesday, 01/06/04
-----------------
Factory Orders (DM)        Nov  Forecast:   -1.4%  Previous:     2.2%
ISM Services (DM)          Dec  Forecast:    60.8  Previous:     60.1


-------------------
Wednesday, 01/07/04
-------------------
None


------------------
Thursday, 01/08/04
------------------
Initial Claims (BB)      01/02  Forecast:    345K  Previous:     339K
Wholesale Inventories (DM) Nov  Forecast:    0.5%  Previous:     0.5%
Consumer Credit (DM)       Dec  Forecast:   $4.6B  Previous:    $0.9B
December Same-Store Sales reports


----------------
Friday, 01/09/04
----------------
Nonfarm Payrolls (BB)      Dec  Forecast:    140K  Previous:      57K
Unemployment Rate (BB)     Dec  Forecast:    5.9%  Previous:     5.9%
Hourly Earnings (BB)       Dec  Forecast:    0.2%  Previous:     0.1%
Average Workweek (BB)      Dec  Forecast:    33.9  Previous:     33.9


Definitions:
DM=  During the Market
BB=  Before the Bell
AB=  After the Bell
NA=  Not Available


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You may also fax the information to: 303-797-1333


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

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


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Contact Support
The Option Investor Newsletter                   Sunday 01-04-2004
Sunday                                                      2 of 5


In Section Two:

Watch List: Plenty to Watch Next Week!
Put Play of the Day: WHR
Dropped Calls: ADI, QCOM
Dropped Puts: None


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

Plenty to Watch Next Week!

Diebold - DBD - close: 54.40 change: +0.53

WHAT TO WATCH:  DBD offered a very strong run from its March lows 
like many stocks last year.  Fortunately for DBD shareholders 
buying interest has kept the selling to a minimum during November 
and December.  Three times investors bought the dip below the 
$52.50 level in the last several weeks and now the stock looks 
ready to retest its highs.  Shares don't move that fast but the 
look strong.

Chart=


---

eBay Inc - EBAY - close: 63.00 change: -1.61

WHAT TO WATCH:  It's usually a dangerous past time to short 
shares of EBAY but the stock is looking pretty tired here.  After 
the big run from November's low near $50 it wouldn't surprise us 
to see it pull back to the mean between $57 (its 50-dma) and the 
$60 level.  Trade carefully!

Chart=


---

Golden West Financial - GDW - close: 101.05 change: -2.14

WHAT TO WATCH:  Banks were not the strongest sector on Friday and 
both the BIX and BKX indices look poised for more selling.  
Looking at GDW we see the third major failure under the $104 
level in two month's time.  If the stock breaks the $100 mark it 
may be a short-trip to $95 and potentially lower.  Volume was 
pretty strong on Friday's decline.

Chart=


---

Thor Industries - THO - close: 55.29 change: -0.93

WHAT TO WATCH:  Shares of THO have been stuck in a declining 
trend of lower highs since early November.  It's simple 50-dma 
has finally turned lower and its MACD is ready to produce another 
new sell signal.  Traders can watch for a drop under the $55 mark 
as a potential trigger.  There is support at $52.50 but its 
simple 200-dma near $48 may be a siren call that the stock is 
unable to resist.

Chart=


---

USANA Health Sciences - USNA - close: 29.79 change: -0.81

WHAT TO WATCH:  The consolidation in USNA looks like it's about 
to take a turn for the worse.  Shares have broken the $30 level 
of support with a strong volume decline this Friday.  Traders 
might want to keep an eye on it for a move to the $25 region.

Chart=



----------------------------
RADAR SCREEN - more to watch
----------------------------

SINA $37.90 +4.15 - The Chinese Internet stocks were on the run 
again this Friday.  SINA out performed its two fellows with a 
12.29% gain and breaking above its 50-dma.  A run to its old 
highs near $45 may be possible.

NTES $40.91 +3.99 - NTES was just behind SINA with a 10.8% jump 
on Friday sending it above the $40 mark and its simple 200-dma.  
Volume was strong but watch out for its 50-dma under $45.

SOHU $32.70 +2.79 - Of the three SOHU was the worst performer, up 
just 9.3%.  The stock has been basing along its 200-dma for two 
weeks.  Now shares have broken above their 50-dma.  There is some 
resistance near $35 but don't be surprised to see it charge 
towards $40.

SUNW $4.70 +0.23 - SUNW turned in a strong session.  Traders 
bought the midday dip to $4.60.  Speculative bulls might play 
this one with an eye on its summer highs.

STX $19.31 +0.41 - Is STX on the rebound?  Shares have reclaimed 
their simple 200-dma.  Can they break above the 50-dma and the 
$20 mark?  

IOM $6.04 +0.06 - Computer storage device/hard drive stocks did 
pretty well on Friday.  IOM actually lagged the sector index but 
Friday was the first close over the $6.00 mark in months.   Could 
this stock have bottomed?  Another hard drive stock to watch is 
WDC. 

FS $49.89 -1.26 - The bounce in FS appears to have petered out.  
The close under the round-number $50 mark is not a bullish one 
and its MACD is about to produce a new sell signal.  Target a 
move to $45.


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*******************
THE PLAY OF THE DAY
*******************

Put Play of the Day:
********************

Whirlpool Corporation - WHR - cls: 71.18 chng: -1.47 stop: 73.50

See details in play list




**************************
PICKS WE DROPPED THIS WEEK
**************************

Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


CALLS
^^^^^

Analog Devices - ADI - close: 45.79 change: +0.14 stop: 44.00

While ADI did provide the rebound off the bottom of its rising 
channel that we were looking for, the fact that there was no 
follow-through has had us feeling nervous about it the play for 
the past few days.  Once again, the bulls tried to drive the 
stock higher on Friday, only to have the stock knocked back near 
the $45.75 price magnet.  Two weeks after initiating coverage, 
ADI has still been unable to post a close over the 50-dma.  
Rather than continue to wait and hope, we're going to pull the 
plug this weekend, focusing our attention on stronger plays.

Picked on December 18th at   $45.12
Change since picked:          +0.67
Earnings Date               2/17/04 (unconfirmed)
Average Daily Volume =     3.21 mln


---

Qualcomm, Inc. - QCOM - cls: 53.62 chng: -0.31 stop: 52.00

Monday's sharp run at the $55 level looked really encouraging for 
our QCOM play, so we decided to let it ride and see if there was 
another upward surge in store.  Indeed there was this morning, 
but it was quickly knocked back in the afternoon after once again 
failing to hit $55.  Daily Stochastics are now tipping over from 
overbought, and with a solid gain in the play, we're taking the 
conservative approach this weekend and closing it out.  Use any 
early strength on Monday to exit at a more favorable level.

Picked on December 11th at   $50.14
Change since picked:          +3.48
Earnings Date               1/20/04 (unconfirmed)
Average Daily Volume =     8.81 mln



PUTS
^^^^

None


***********
DEFINITIONS
***********

SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.


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DISCLAIMER
**********

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Contact Support
The Option Investor Newsletter                   Sunday 01-04-2004
Sunday                                                      3 of 5


In Section Three:

Current Calls: DGX, GD, GILD, YHOO
New Calls: None
Current Put Plays: NSM
New Puts: BBY, WHR


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******************
CURRENT CALL PLAYS
******************

Quest Diagnostic - DGX - close: 72.25 chg: -0.86 stop: 69.00

Company Description:
Quest Diagnostics Incorporated is the nation's leading provider 
of diagnostic testing, information and services, providing 
insights that enable physicians, hospitals, managed care 
organizations and other healthcare professionals to make 
decisions to improve health. The company offers the broadest 
access to diagnostic laboratory services through its national 
network of laboratories and patient service centers. Quest 
Diagnostics is the leading provider of esoteric testing, 
including gene-based medical testing, and empowers healthcare 
organizations and clinicians with state-of-the-art connectivity 
solutions that improve practice management.
(source: company press release)

Why We Like It:
We don't have much new to report on for DGX.  Shares pulled back 
on Friday as the market slipped lower in mild profit taking.  
Traders can probably wait for DGX to pull back to the $70-71 
levels and wait for a bounce there to gauge the next attractive 
entry point.  The simple 50-dma should bolster support at the $70 
mark so we're going to keep our stop loss at $69.00.  A buying 
the bounce will make the $75 level (current resistance) a nice 
short-term target but the top of the channel is much higher.  

Suggested Options:
We've only got two weeks left for January options now.  It may be 
prudent to play the February strikes.  Our suggested option is 
the Feb.70's.

BUY CALL JAN 70 DGX-AN OI=1926 at $2.70 SL=1.35
BUY CALL JAN 75 DGX-AO OI= 728 at $0.40 SL= -- 
BUY CALL FEB 70*DGX-BN OI=1471 at $3.90 SL=1.95
BUY CALL FEB 75 DGX-BO OI= 598 at $1.30 SL=0.65

Annotated chart of DGX

 


Picked on December 30 at $72.95
Change since picked:     - 0.70
Earnings Date          01/22/03 (unconfirmed)
Average Daily Volume:      836  thousand
Chart =


---

General Dynamics - GD - close: 89.66 chg: -0.73 stop: 84.99 

Company Description:
General Dynamics, headquartered in Falls Church, Va., employs 
approximately 66,900 people worldwide and anticipates 2003 
revenues of $16.1 billion. The company has leading market 
positions in mission-critical information systems and 
technologies, land and amphibious combat systems, shipbuilding 
and marine systems, and business aviation.
(source: company press release)

Why We Like It:
The last couple of weeks have been quiet ones for GD.  Thankfully 
the holidays were terror-free.  However, that means we could see 
a small pull back in GD as some defensive players exit their 
positions.  This could give us a better entry point on a dip to 
the $86-87 levels.  If GD breaks the $86 level we'd probably 
begin to worry.  

Let's not forget that it was just two weeks ago that the BAC 
analyst raised GD's price target to $95 and lifted the stock to a 
buy.  We actually think GD may be able to trade higher.  
Currently its point-and-figure chart suggests a target closer to 
$124.  We'd be happy with a move to $100.  We're going to keep 
our stop loss at $84.99 for now but anywhere under $86 should 
work.

Suggested Options:
We like the January and February strikes.  We're now suggesting the 
February 85s as the best play.

BUY CALL JAN 85 GD-AQ OI=3874 at $4.90 SL=2.50
BUY CALL JAN 90 GD-AR OI=3182 at $1.30 SL=0.65
BUY CALL FEB 85*GD-BQ OI= 992 at $5.90 SL=3.00
BUY CALL FEB 90 GD-BR OI= 934 at $2.65 SL=1.30

Annotated Chart:

 

Picked on December 21 at $88.78
Change since picked:     + 0.88
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million 
Chart =


---

Gilead Sciences - GILD - close: 58.02 change: -0.26 stop: 56.00

Company Description:
Gilead Sciences, Inc. is a biopharmaceutical company that 
discovers, develops and commercializes therapeutics to advance 
the care of patients suffering from life-threatening diseases 
worldwide.  The company has seven commercially available 
products. Its research and clinical programs are focused on anti-
infectives, including anti-virals and anti-fungals.  GILD 
endeavors to grow its existing portfolio of products through 
proprietary clinical development programs, internal discovery 
programs and an active product acquisition and in-licensing 
strategy.  Products include Viread, Emtriva, AmBisome, Hepsera, 
Tamiflu, DaunoXome and Vistide.

Why we like it:
Breaking out of the top of its neutral triangle formation just 
far enough to trigger our play to live status on 12/23, GILD has 
spent the past several sessions gently drifting lower.  The past 
3 sessions have seen the stock find support near the 30-dma 
(currently $57.90), which is encouraging when combined with the 
fact that the daily Stochastics oscillator (5,3,3) has bottomed 
in oversold territory and is beginning to turn up.  Additionally, 
the lower trendline of the neutral triangle has now risen to just 
above $57, reinforcing the support being found at the convergence 
of the 20-dma ($57.81) and 30-dma.  This provides the setup for a 
favorable risk-reward entry on bounces from support.  Target 
entry on a dip and rebound from anywhere between $57-58 in 
anticipation that our expected breakout will come to pass.  
Traders that want to see the proof in the price action before 
playing will need to wait for a rally through $60.50 (just above 
the 12/23 high) before playing.  Maintain stops at $56.

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

Longer Term: Aggressive traders looking to capitalize on an 
extended rally will want to look to the February 65 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 looking for more insulation from time decay 
will want to use the February 60 Call.  Our preferred option is 
the February $60 strike.

! Alert - January options expire in two weeks!

BUY CALL JAN-55 GDQ-AK OI=2171 at $3.70 SL=2.25
BUY CALL JAN-60 GDQ-AL OI=9444 at $0.85 SL=0.40
BUY CALL FEB-60*GDQ-BL OI=7595 at $2.15 SL=1.00
BUY CALL FEB-65 GDQ-BM OI=2038 at $0.80 SL=0.40

Annotated Chart of GILD:

 

Picked on December 21st at   $59.40
Change since picked:          -1.38
Earnings Date               1/29/04 (unconfirmed)
Average Daily Volume =     3.85 mln


---

Yahoo! - YHOO - close: 45.40 change: +0.37 stop: 42.00

Company Description:
Yahoo! Inc. is a leading provider of comprehensive online 
products and services to consumers and businesses worldwide. 
Yahoo! is the No. 1 Internet brand globally and the most 
trafficked Internet destination worldwide. Headquartered in 
Sunnyvale, Calif., Yahoo!'s global network includes 25 world 
properties and is available in 13 languages.
(source: company press release)

Why We Like It:
Do you remember a few months ago about the big expectations for a 
resurgence in online advertising in 2004?  Well the talk is back 
and YHOO is a lead contender to benefit from just such a comeback 
for the online ad industry.  We aren't the only ones bullish on 
YHOO.  Goldman Sachs just upped their revenue and earnings 
projections for YHOO's fourth quarter of 2003 and their full year 
2004 estimates.  Many had expected the online shopping season to 
be blockbuster this year and so far the numbers look good, which 
should help YHOO's Q4.  

The stock performed reasonably well last week and has been slowly 
inching higher but we'd like to see more of a follow through on 
the reverse head-and-shoulder pattern that YHOO has created.  If 
shares dip, then look for a bounce from the $44 level.  
Meanwhile, keep your ears open for any news on Monday, January 
5th when YHOO's management is due for an appearance at the Smith 
Barney Citigroup Entertainment, Media and Telecom conference in 
Arizona.  

Suggested Options:
We don't plan on holding YHOO calls longer than January's
expiration so our favorite strike is the January 42.50's.

BUY CALL JAN 40.00 YHQ-AH OI=11157 at $5.70 SL=3.25
BUY CALL JAN 42.50*YHQ-AV OI=11399 at $3.50 SL=1.75
BUY CALL JAN 45.00 YHQ-AI OI=22415 at $1.75 SL=0.85
BUY CALL FEB 40.00 YHQ-BH OI=  562 at $6.30 SL=3.75
BUY CALL FEB 42.50 YHQ-BV OI=  578 at $4.40 SL=2.25
BUY CALL FEB 45.00 YHQ-BI OI= 1488 at $2.90 SL=1.45

Annotated chart of YHOO:

 


Picked on December 24 at $45.01
Change since picked:     + 0.39
Earnings Date          01/14/03 (unconfirmed)
Average Daily Volume:      12.3 million 
Chart =



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

None


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*****************
CURRENT PUT PLAYS
*****************

National Semi. - NSM - cls: 38.64 chng: -0.77 stop: 40.50*new*

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:
Following the initial drop down near the $36 level, NSM began an 
excruciatingly slow trip back up to test the $40 resistance 
level, which we suspected would be a pivotal level after it broke 
in early December.  That intuition must have been correct, as the 
stock did battle with that level as resistance for more than a 
week before truly rolling over on Friday.  Losing just under 2% 
in the process, NSM reversed back under the 20-dma ($39.44) and 
closed near the low of the session, handily outpacing the 0.64% 
loss in the overall Semiconductor sector (SOX.X).  We've been 
talking about rollover entries near $40 for a while now, so 
hopefully you got a piece of that entry point while it was 
offered.  Traders looking to enter on weakness should now set 
their sights on a renewed break below $38, which was the level at 
which the initial PnF Sell signal was issued.  We can expect NSM 
to still find some mild support near $36, but once below there, 
it ought to be a fairly straight shot down to our $32 target.  
Note that we're lowering our stop to $40.50 this weekend.  If the 
bulls couldn't breach that level for the past 2 weeks, that tells 
us that a breakout over that level next week would be 
confirmation that the bulls have once again gained the upper 
hand.

Suggested Options:
Aggressive short-term traders can use the January 40 Put, while 
those with a more conservative approach will want to use the 
February 40 put.  Our preferred option is the February 40 strike, 
as it is in the money and provides greater insulation against 
time decay.  

! Alert - January options expire in two weeks!

BUY PUT JAN-40 NSM-MH OI=2936 at $2.85 SL=1.25
BUY PUT FEB-40*NSM-MH OI=2936 at $2.85 SL=1.25
BUY PUT FEB-35 NSM-MG OI=1668 at $0.85 SL=0.40

Annotated Chart of NSM:

 

Picked on December 9th at     $38.70
Change since picked:           -0.06
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      3.52 mln



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

Best Buy Company - BBY - close: 50.82 change: -1.42 stop: 53.50

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

Why we like it:
Finishing its holiday rally on December 1st, BBY was one of the 
first Retail stocks to end its upward trend as traders rushed to 
take profits.  Hastening the stock's decline was the company's 
narrowing of its guidance on December 4th.  The resulting decline 
broke below the bottom of the rising channel that had been in 
place for most of the year.  Now more than $10 off its December 
high, one might be tempted to think that a base is building near 
the $50 level.  But a quick look at the PnF chart tells a 
different story, as the Sell signal from December provides a 
bearish price target of $42.  Take a look at the daily chart, and 
it is clear that the $42 level should be the site of strong 
support.  That's quite a hefty slide from current levels though, 
so we're going to establish an intermediate target at $46, also 
the site of the 200-dma ($45.77).

Friday's session delivered a 2.7% slide in shares of BBY, along 
with a close just above the intraday low.  That pullback is 
particularly encouraging in that it exceeded the 2% loss in the 
Retail index (RLX.X), which itself staged an impressive bearish 
intraday reversal.  A failed rebound back near $52, also the site 
of the 20-dma ($51.98) looks like the ideal entry point into the 
play, especially with the daily Stochastics (5,3,3) just starting 
to tip over from overbought territory.  The first level of 
potential support to deal with will be found near $48.50, which 
provided enough support for a brief bounce twice in the latter 
half of December.  Therefore, momentum traders looking to enter 
on weakness will want to see a drop below $48.50 before playing.  
The most recent rebound attempt topped out just below $53 and 
with the 100-dma ($53.33) just above there, we have a solid 
resistance zone we can use to protect our $53.50 stop.  Look for 
continued weakness from the RLX index to confirm weakness in BBY 
before playing.

Suggested Options:
Aggressive short-term traders can use the January 47 Put, while 
those with a more conservative approach will want to use the 
January 50 put.  We've also listed February strikes for those 
traders desiring greater insulation from time decay.  Our 
preferred option is the February 50 strike, as it is currently at 
the money and provides more time until expiration.

! Alert - January options expire in two weeks!

BUY PUT JAN-50 BBY-MJ OI=20245 at $1.30 SL=0.65
BUY PUT JAN-47 BBY-MW OI= 5123 at $0.50 SL=0.25
BUY PUT FEB-50*BBY-NJ OI=  237 at $2.55 SL=1.25
BUY PUT FEB-47 BBY-NW OI=  302 at $1.60 SL=0.75

Annotated Chart of BBY:

 

Picked on January 4th at     $50.82
Change since picked:          +0.00
Earnings Date               3/17/04 (unconfirmed)
Average Daily Volume =     4.20 mln


----

Whirlpool Corporation - WHR - cls: 71.18 chng: -1.47 stop: 73.50

Company Description:
Whirlpool Corporation manufactures and markets a full line of 
major appliances and related products, primarily for home use.  
The company's principal products are home laundry appliances, 
home refrigerators and freezers, home cooking appliances, home 
dishwashers, room air-conditioning equipment and mixers and other 
small household appliances.  Approximately 10% of WHR's unit 
sales volume is derived from purchases from other manufacturers 
for resale by the company.  It also produces hermetic compressors 
and plastic components, primarily for the home appliance and 
electronics industries.

Why we like it:
Kicked off by the sharp drop in Existing Home Sales on Tuesday, 
the Housing sector really got kicked in the teeth last week, 
capped off by the 3.3% slide on Friday, which was partially 
related to the sharp rise in bond yields.  That rise in yields 
will translate directly to increased costs for acquiring a house 
and will start to increase the pressures in the sector.  Anyone 
who has tried playing the downside in Housing stocks over the 
past several months knows that it has been a losing game, as 
every dip is eagerly bought.  So we thought we'd take another 
tack -- why don't we take a bearish shot at one of the many 
stocks that feeds into the whole home construction and purchase 
life cycle.  Jumping immediately to our attention was WHR, as the 
stock has been trading in a predictable range from $66-73 for 
months.  The reversal in the Housing sector kicked off the latest 
reversal on Friday, with the stock just topping $73 before 
dropping more than 2% to close just off its low of the day.  

The play is simple, as we want to enter as close to the top of 
the range as possible and ride the stock down as close as 
possible to the bottom of the range.  Oscillators are the most 
effective when they are used in a trading range or on a stock 
that oscillates predictably.  So the fact that the daily MACD and 
Stochastics gave fresh Sell signals on Friday only makes the play 
look that much better.  A failed bounce below $72 will be the 
ideal entry opportunity if we can get it.  Traders that would 
prefer to enter on weakness will want to enter on a break below 
the $71 support level.  On the way down, we can expect WHR to 
find mild support near $68 enroute to the bottom of its range at 
$66, also our target for the play.  Set stops initially at 
$73.50, just above the recent highs as well as the October high 
of $73.35.

Suggested Options:
Aggressive short-term traders can use the January 70 Put, while 
those with a more conservative approach will want to use the 
January 75 put.  While February strikes are available, open 
interest is still quite low, so we've gone out to the March 
expiration cycle for those traders desiring greater insulation 
from time decay.  The March $70 strike is our preferred option.

! Alert - January options expire in two weeks!

BUY PUT JAN-75 WHR-MO OI=647 at $4.30 SL=2.75
BUY PUT JAN-70 WHR-MN OI=777 at $1.05 SL=0.50
BUY PUT MAR-70*WHR-ON OI=968 at $3.20 SL=1.50

Annotated Chart of WHR:

 

Picked on January 4th at      $71.18
Change since picked:           +0.00
Earnings Date                2/05/04 (unconfirmed)
Average Daily Volume =         601 K



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The Option Investor Newsletter                   Sunday 01-04-2004
Sunday                                                      4 of 5


In Section Four:

Leaps: A Clean Slate
Traders Corner: Get Out The Leafblower, It's Time To Turn Them 
    Over
Futures Corner: A New Year's Projection (Resolution)


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*****
LEAPS
*****

A Clean Slate
By Mark Phillips
mphillips@OptionInvestor.com

Finally, the calendar has rolled over to 2004 and everyone has a 
clean slate for the new year.  The funds (mutual and hedge) have 
booked their gains for the year and now have to see if they can 
duplicate or better those results this year.  No more just 
protecting gains, everyone is back in the hunt for profits.  Why 
is that important?  Because it should remove at least a portion of 
the artificiality of the equity market that we have impatiently 
endured since Labor Day.

We saw a touch of encouraging market action on Friday, with an 
actual downward move in price as the intraday oscillators dropped 
out of overbought.  While that is the natural course of market 
behavior, we haven't seen it on a consistent basis for several 
months.  The afternoon weakness may have been caused by early 
profit-taking of the gains from 2003 or concerns over terrorism 
heading into the weekend or any other number of factors.  To me it 
doesn't matter -- I'm encouraged by seeing a hint of normal 
cyclical market action.  I say "hint of" because I am painfully 
aware that one day (or even one week) does not make a trend.  
Without a doubt, we'll have to take things one day at a time, but 
I fully expect 2004 to offer more rationality than we saw in the 
latter half of 2003.

That expectation has nothing to do with my overall view for the 
markets this year though.  Clearly, the big averages have run too 
far, too fast into the end of the year and they're due for some 
retracement in early January.  That certainly lines up nicely with 
Jim's expectations for the seasonal decline of several hundred 
points in January.  I don't normally put a lot of stock into 
historical/seasonal patterns because they are so closely 
associated with statistics, which are manipulable.  

It reminds me of a saying I learned from dear old mom.  "There are 
three types of liars; liars, damned liars and statisticians."  
Those were some pretty wise words that have served me well over 
the years, especially as I am confronted by government statistics 
that are so clearly disingenuous.  Nowhere is this more clear than 
in the pronouncements from the Fed and official government 
propaganda, er, I mean economic reports, stating that inflation is 
benign.  At the same time, I look at the sharp rise in virtually 
every commodity, housing, health care and energy costs, not to 
mention the sharp rise in equities over the past 6 months.  Is it 
any coincidence that the price of everything that is denominated 
in dollars is rising while the dollar continues to weaken to new 
multi-year lows against every conceivable currency, even the 
ruble?

The only place we don't see inflation is in the price of 
manufactured goods.  The majority of what we buy now comes from 
Asia, where labor costs are miniscule compared to what is 
available here in the United States.  So those products that are 
imported continue to be quite cheap.  Domestic manufacturers must 
remain competitive and thus cannot raise prices.  There is no 
pricing power in the consumer marketplace, leaving us with the 
inescapable conclusion that in the manufacturing sector, inflation 
is benign.

The problem is that if the cost for raw materials -- from energy 
to copper and steel to health care (a necessary expense related to 
domestic labor) -- is rising and companies cannot raise the prices 
for the manufactured goods, then profits will fall.  Unless, of 
course, companies can find ways to reduce their cost structures.  
They've been engaged in that practice with a vengeance for the 
past 2 years, cutting employment to the bare minimum.  Now hiring 
is beginning to pick up again, so the worst is over, right?  
Wrong!  The dirty little secret of the employment picture is that 
the majority of jobs lost during the past couple years were in the 
skilled manufacturing, engineering, software, technical and 
skilled service areas.  Guess what?  When those jobs are re-
activated due to increasing demand, they won't be re-activated 
here in the U.S. -- they're being moved overseas (predominantly to 
Asia) because of the more favorable cost structure.  India is 
particularly attractive to employers, because of the heavy 
emphasis on English language skills.

Place a call to customer service or technical support for Dell or 
Microsoft or Chevron for that matter and odds are good you are not 
speaking to a person here in the U.S.  I don't view this 
development as either good or bad -- but it is reality.  We can 
ignore it and hope it goes away, but we do so at our own peril.  
This seems to be what is happening with organized labor today.  
For decades, labor unions have been able to negotiate very 
favorable compensation packages for skilled and unskilled labor.  
But the net result is that salaries for this sector of the economy 
have risen further than is reasonable.  

Case in point is when I was an engineer at NASA, I was better paid 
than the onsite contract engineers.  But I was paid significantly 
less than the contract mechanics and electricians, even those with 
less years of experience than I had.  I had more education, more 
experience and more responsibility, yet my compensation was lower.  
That is the result of having a powerful body to lobby for your 
interests.  Since leaving that world, the spread has only widened. 
I have never begrudged organized labor for what they have 
achieved, but now I look at the global picture and fear that 
domestic labor may be in the process of pricing themselves right 
out of existence.

If equivalent skills can be found in Asia for 10% of the cost, why 
wouldn't a domestic manufacturer move as much of its operations 
overseas as possible?  It's about competition and fairness has no 
place in that equation -- only profits.  I expect the trend of 
skilled jobs migrating to Asia to only accelerate in the years 
ahead and that doesn't paint a pretty picture for U.S. employment 
in any of the established industries except perhaps for health 
care services.  While I know it is a politically unpopular view, I 
believe that labor unions to a large degree have outlived their 
usefulness and are now in the process of bringing about their own 
extinction.

Businesses are interested in only one thing - profits.  If the 
costs of doing business are too high in one geographic area, 
operations will naturally migrate to an area where they are more 
reasonable.  There's a reason we're seeing so many labor disputes 
lately and it is because management is being squeezed between 
increased costs of production and an inability to pass that 
increased cost on to the consumer.  The only viable solution is to 
cut the cost of production -- that involves first trying to gain 
concessions from current employees and than taking the more 
drastic action of beginning to eliminate domestic employment 
costs, replacing them with far less expensive labor overseas.  It 
is a trend that is still in its infancy, but it is going to cause 
a lot of pain to established industries here in the U.S. in the 
years ahead.  Either that, or organized labor is going to have to 
stop viewing management as the enemy and the two sides will have 
to work together towards their common goals of employment AND 
profitability.

Looking at the breakdown of the "increased employment" in recent 
months supports this view, as the majority of the new jobs are 
being found in the administrative services, temporary employment, 
and food service industries.  While I wouldn't denigrate any job, 
these are clearly lower on the food chain -- receiving lower wages 
for more service-oriented work.  Service-oriented jobs don't 
necessarily support any sort of manufactured end product and with 
many of the jobs being created lower on the wage scale, we can see 
that just reporting the number of jobs created/lost on a weekly 
basis misses the mark of telling us what is really happening in 
the employment picture.  We may be growing jobs, but the actual 
total wages earned may be lower.  How is that going to support 
growth in GDP?

As I see it, there are really only two viable sources of true 
employment growth that we can look at as having the capability to 
have a positive impact on the economy.  The first is the area of 
self-employment.  There is a huge shift away from fixed employees 
to using independent contractors in the business world.  Many of 
my friends are self employed now and this is a trend that will 
only gain momentum in the years ahead, with individuals seeking 
greater control of their earning potential as well as greater 
flexibility in terms of when to work and when not to.  

The other key area of growth will be the area in which the U.S. 
has always been ahead of the rest of the world -- namely 
innovation and new technologies.  Anyone that wants to sell the 
U.S. short and ignore American ingenuity (due largely to the 
diversity of people and ideas found here) is taking a huge risk.  
The new technologies will be discovered and exploited here, adding 
jobs to the overall economy, while those from the old economy 
(manufacturing and established technologies) make their natural 
transition to other lower-cost markets.  The big question is 
whether the new job creation can outpace the old job migration, a 
question to which I do not have an answer.

If I had to pick out one factor that I expect to be the dominant 
issue in the year ahead, I would have to zero in on the U.S. 
Dollar.  The Dollar Index (DX00Y) lost nearly 15% last year, and 
that came on the heels of 2002's more than 12% loss.  Measured 
against other currencies directly, the picture looks even worse.  
With the dollar hitting new all-time lows against the Euro and 11-
year lows against the pound, it certainly exposes the grand lie of 
our current administration supporting a "strong dollar" policy, 
doesn't it.  

The big question is where the turning point will be.  When do our 
foreign creditors start to shy away from gobbling up all of our 
Fed-issued debt and demand a higher rate of return for loaning 
money to the U.S., for what is becoming a greater and greater risk 
as our twin half-trillion dollar deficits (trade imbalance and 
budget deficit) continue to grow.  The net result will be rising 
interest rates, which is not conducive to promoting strong 
business growth or continued consumer spending.  How far will 
foreign central banks allow the dollar to fall before demanding 
(by showing weak interest in upcoming Treasury auctions, leading 
to falling bond prices and rising bond yields -- isn't the free 
market wonderful?) a greater return on their investment.  I'm sure 
you notice that I've ignored the action of the Fed in this 
interest-rate equation and the reason why is that body is 
completely impotent at this point.  The only tool left is further 
stimulation of the money supply by running the printing press 
closer to the redline.  That will further weaken the dollar and 
exacerbate the problem.

But Murphy is alive and well.  So what if he conspires to make me 
look like a fool (as happens all too often) and the dollar 
actually begins to recover in the year ahead.  The line in the 
sand is the 92 level on the DX00Y, and I don't think it is 
possible in the current fiscal climate for that level to be 
exceeded.  But let's assume that I'm wrong there too and the DX00Y 
manages to work its way clear up to the 100 level, just below 
where it began 2003.  Wouldn't that be a good thing?  No, I don't 
think so.  As I'm sure you recall from some of my recent articles, 
I've exposed the reality that all of the gains in the overall 
market since the initial pop off the March lows are due to 
currency effects.  So if the trend of the dollar were to reverse, 
all that is going to do is reverse the illusory rally in the 
equity market -- assuming real stock values remain constant -- and 
that means a falling equity market.

Dangers to the left and dangers to the right and us caught right 
in the middle.  Unfortunately, this dismal view is independent of 
my view of the current rally being just a bull correction in an 
overall bear market.  I view this rally as extremely long in the 
tooth, yet I can't shake the feeling that there is not a powerful 
downward leg in our future for 2004 -- at least not in parallel 
with what we saw in 2000, 2001 or 2002.  I find it difficult to 
quantify why I feel that way, except for a strong intuitive feel 
that the economy and the market will be supported all the way into 
the November election.  Beyond that point, all bets are off, and I 
suspect the following year could be extremely painful, resulting 
in new lows across all the major indices (except perhaps for the 
NASDAQ).  This is not a majority view (which gives me some 
comfort), but I find myself at odds with several analysts and 
traders for whom I have a great deal of professional respect.  
Many of these individuals are expecting great carnage in 2004, and 
each of them can make a compelling technical or fundamental case 
for their positions.  In the end, it is all idle speculation as to 
the long-term behavior of the market -- an activity that I prefer 
to leave to the psychotropically-induced visions of such special 
people as Harry Dent.

Now that I've given my VERY big picture view, let's return to the 
land of reality in the here and now.  We're likely to see some 
weakness in January and maybe into early February.  The extent of 
that weakness and the subsequent strength of the rebound should 
tell us a lot about what to expect for the balance of the year.  
Let's hope that somewhere in there we will see the VIX move back 
up to at least 25, bringing normal ebbs and flows to the market, 
rather than the artificial action that has prevailed for the past 
several months, with the VIX drilling to new multi-year lows.

I'm all talked out on this topic, so let's delve into the 
individual plays we're tracking and see what sense we can make of 
the action over the holiday period and what might be in store just 
ahead.

Portfolio:

WMT - We could have chalked up all of last week as meaningless 
drift if it weren't for WMT's steep plunge on Friday, in line with 
the drop in the rest of the market and the 2% slide in the Retail 
index.  The stock had been creeping up towards resistance in the 
$53.25-53.50 area and pushed towards the top of that range on 
Friday morning before being sold right back to the bottom of its 
range of the past couple weeks near $52.  With daily oscillators 
just turning bearish, WMT looks like it should break below $52 
next week and make a run at that lower trendline, now just over 
$50.  We'll still want to take advantage of that drop to harvest 
gains on the play and I'll make mention of any significant 
developments in the Market Monitor next week.  Maintain stops at 
$54 for now.

SBUX - It may be slow, but at least it is consistent.  SBUX 
finally pushed above the top of its month-long consolidation last 
week and even broke out to a new high on Friday before getting 
pummeled back with the rest of the market.  There's nothing here 
that causes any undue concern and we should view any pullback into 
the $30-31 area as a viable entry point for those that may have 
missed the opportunity last year.  Raise stops to $28.  Even 
though that is still above the 200-dma, I can't envision any price 
movement that could occur in the next 2 weeks to challenge that 
level -- and even if it did happen, I think you'll agree we'd want 
to be out of the play.

QQQ - The bulls pulled it off and closed the year with the NASDAQ 
over 2000 and the QQQ handily above $36.  The big question now is 
"what next?"  Personally, I still favor the downside for the next 
several weeks and similar to the DOW and S&Ps, the measure of what 
to expect for the rest of the year is likely to come from the 
depth of the decline over the next several weeks and how strong 
the buying interest is at the end of that decline.  For traders 
not yet in this play, I view current levels as an excellent place 
to enter the fray, using our stop at $38 for protection.  More 
conservative traders could wait for a break of the rising 
trendline (currently $34.70) before playing, but that will likely 
give up a fair portion of the initial move potential down to the 
200-dma (currently $31.75).  Our best-case expectation for the 
play is for a drop to strong support at $30, but that size of a 
pullback will probably require some sort of external catalyst, 
which is currently unknown to me.

DJX - The DJX pushed right up to take out our $104 stop on Monday 
and then trolled sideways until the excitement on Friday that 
looks an awful lot like a key reversal session.  Maybe the January 
selling has gotten off to an early start?  Only time will tell, 
but the conditions still look ripe for a broad market short on the 
DJX.  So with the current play dropped on Monday, I'm moving the 
DJX right back onto the bearish Watch List.  See the Drop writeup 
below for full details.

Watch List:

SMH - Our patience was rewarded last week, as the SMH finally 
clawed its way back up to the $42 level.  The only remaining 
question is whether it truly is the entry point I think it is.  
For better or for worse, we logged a new Portfolio position for 
the SMH this week, with full details below.

NEM - Gold and gold stocks continue to vacillate near their highs, 
but this feels just like a local top.  I have great expectations 
for both the yellow metal and the mining stocks over the next year 
or two, but this is not the point at which I think new entries are 
advisable.  No matter how I turn the charts, I just can't make a 
technical argument for entering our NEM play at current levels.  
We need to see a more protracted pullback first and the recent dip 
near $46 just wasn't enough to get the job done.  The necessary 
pullback will likely be accompanied by a near-term rebound in the 
dollar.  Both moves are likely to be transitory and will set up a 
much more favorable entry into our NEM play, preferably near 
strong support at $40, but possibly as high as $42.

QCOM - Nothing substantial transpired with our QCOM play last 
week, except that it got even more extended.  It is continuing to 
hold near its highs, although potentially a pullback inside the 
rising channel could occur next week.  There's no way to take a 
bullish position here and expect anything but a loss on a longer-
term position.  Wait and watch is the prescribed course of action 
for now, so QCOM remains on HOLD.

EK - Beginning to work its way higher, EK actually stabbed the $26 
level early on Friday before pulling back sharply into the close.  
While aggressive shorter-term traders might have taken that as a 
bearish entry point, it's not what we're after.  Our entry target 
is for a rally failure near the top of the September gap near $27, 
which ought to coincide with a rejection from the vicinity of the 
200-dma (currently $27.19).

HD - While trying to make some significant upward progress, HD was 
stymied on Friday by the broad market weakness after the initial 
pop higher and more directly by the continued selloff in the 
housing sector.  But that's alright, we can wait for our entry 
target to be satisfied, right?  Continue to look for that failed 
rally in the $37-38 area at the top of the long-term falling 
channel.

SNDK - The recent rise in SNDK stalled out near $62 aqnd the stock 
has been drifting sideways for over a week.  It appears that a 
sort of equilibrium is being found near current levels, and it 
remains to be seen whether we'll get that desired entry point down 
near the $50 level.  Should the normal January profit taking 
occur, then it looks like it is still quite possible, so I'm not 
willing to modify the plan of action.  As noted a couple weeks 
ago, this is an aggressive play, so we need to wait for it to come 
to us, rather than trying to chase it higher.

Radar Screen:

GENZ - Getting a lift from the rest of the market again last week, 
GENZ is now testing the $50 level and getting within striking 
distance of the critical $52 level.  At the same time, the weekly 
Stochastics are making rapid progress towards overbought 
territory, so perhaps there is hope for this one turning into a 
real play afterall.  There's no need to rush things though, with 
several weeks still to go before those weekly Stochastics will top 
out.  Until then, watching from the sidelines is still the best 
course of action.

Closing Thoughts:
We got a hint of more rational action in Friday's session and with 
volume returning to normal levels again next week, we'll get to 
see if it was a fluke or a taste of what the future holds.  In 
either case, I think we've got a selection of plays that ought to 
perform well here as we kick off a new trading year.  And I'll be 
hard at work trying to identify worthy candidates to add to the 
mix over the weeks and months ahead.

Best Wishes For A Profitable 2004!

Mark


LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
SBUX  11/24/03  '05 $ 30  ZOS-AF  $ 4.30  $ 5.50  +27.91%  $ 28.00
                '06 $ 30  WSP-AF  $ 6.40  $ 7.40  +15.63%  $ 28.00


Puts:
WMT   10/03/03  '05 $ 55  ZWT-MK  $ 5.10  $ 5.90  +15.69%  $ 54.00
                '06 $ 55  WWT-MK  $ 7.20  $ 7.30  + 1.39%  $ 54.00
QQQ   12/09/03  '05 $ 32  ZWQ-MF  $ 2.65  $ 1.70  -35.85%  $ 38.00
                '06 $ 32  WD -MF  $ 3.70  $ 2.65  -28.38%  $ 38.00
SMH   12/30/03  '05 $ 40  ZTO-MH  $ 4.90  $ 5.10  + 4.08%  $ 45.00
                '06 $ 40  YRH-MH  $ 6.60  $ 6.80  + 3.03%  $ 45.00


LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
NEM    10/05/03   $40          JAN-2005 $ 40  ZIE-AH
                            CC JAN-2005 $ 35  ZIE-AG
                               JAN-2006 $ 40  WIE-AH
                            CC JAN-2006 $ 35  WIE-AG
QCOM   11/16/03   HOLD         JAN-2005 $ 50  ZLU-AJ
                            CC JAN-2005 $ 45  ZLU-AI
                               JAN-2006 $ 50  WLU-AJ
                            CC JAN-2006 $ 45  WLU-AI
SNDK   12/21/03   $50-51       JAN-2005 $ 45  XWS-AK
                            CC JAN-2005 $ 40  XWS-AJ
                               JAN-2006 $ 45  YSD-AK
                            CC JAN-2006 $ 40  YSD-AJ



PUTS:
EK     12/21/03  $27           JAN-2005 $ 25  ZEK-ME
                               JAN-2006 $ 25  WEK-ME
HD     12/21/03  $37-38        JAN-2005 $ 35  ZHD-MG
                               JAN-2006 $ 35  WHD-MG
DJX    01/04/04  $105          DEC-2004 $ 100 DJV-XV
                               DEC-2005 $ 100 YDK-XV


New Portfolio Plays

SMH - Semiconductor HOLDR $41.73  **Put Play**

Ever since topping out in early November, the Semiconductor sector 
has been lagging the advance in the rest of the Technology market, 
moving lower in a lower high and lower low manner.  There are two 
possible scenarios at play here - either the Semiconductor index 
is resting up for another strong bullish run while building a bull 
flag pattern, or it is beginning to exhibit relative weakness.  
Based on both the clear weakness on the weekly oscillators and the 
lack of price weakness in recent weeks, we think the latter is 
actually the case.  While it hasn't yet given a Sell signal on the 
PnF chart (that will require a trade at $38), the SMH does look to 
be running out of steam.  One metric we can use is that the 
bullish price target generated on the PnF chart last spring was 
for a rally to $44.  That goal has been achieved and now it 
remains to be seen whether there is some tangible downside to be 
had for us bears.  After the lower high in early December, we 
started looking for a viable entry point and a failed rally in the 
$42-43 area looked like the best setup we were likely to get.  
Sure enough, the SMH finally made it up to that level last Tuesday 
(giving us our entry point) and then consistently was turned back 
from that level throughout the week.  It was nice to see the week 
end with price back under the 50-dma (currently $41.67), but to 
have real confidence in the downside, we'll need to a break back 
under $40 and then the December lows just above $38.  Conservative 
traders may want to wait for SMH to trade $38 (giving that PnF 
Sell signal) before considering entries, and then enter on the 
next failed rally.  We're a bit earlier with the strategy we've 
chosen here, but I think we've got an attractive risk/reward ratio 
working in our favor.  Our downside target will be for a move to 
the $34.50 area, which should coincide with the 200-dma, currently 
at $33.75.  Our initial stop is set at $45, just over the November 
highs.

BUY LEAP JAN-2005 $40 ZTO-MH $4.90
BUY LEAP JAN-2006 $40 YRH-MH $6.60


New Watchlist Plays

None


Drops

DJX - $104.50 This is getting downright annoying!  Twice last 
year, I tried picking a top in the DOW and both times I was early.  
The net result was another losing trade, as the market plowed 
through a level of resistance that I deemed to be impenetrable -- 
at least not without some retracement.  It just goes to prove that 
there are no absolutes.  We entered the play on the first touch of 
$100, and rather than stimulating a round of profit-taking, that 
touch led to another 500-point rally before the profit taking that 
ensued on Friday, long after we were stopped out of the play.  As 
I stated in previous commentary though, this is a play that I 
believe deserves consideration for another round.  We had to stick 
with our discipline and exit the play when our $104 stop was hit 
early last week.  But that doesn't preclude us from taking another 
shot at the downside in the DOW, a move that is way overdue.  So 
DJX is being recycled right back onto the Watch List this weekend.  

The DJX is banging up against the top of its rising channel that 
has held since early April, we've just had an uninterrupted 900 
point rally in the past 6 weeks and there ought to be a good round 
of profit taking over the next 6 weeks or so.  Simply put, the 
risk/reward ratio is quite favorable for another attempt at a 
bearish play from current levels.  But I'm not going to succumb to 
the chase mentality here.  Our entry strategy will be to wait for 
another foray over $105 and that's where we'll take the plunge, 
setting our stop at $107, above both the descending trendline from 
the highs in early 2000, as well as the highs of early 2002.  Our 
initial downside target will be the 50-dma near $99, but with the 
very real potential for a more protracted decline to the $95-96 
area.


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Get Out The Leafblower, It's Time To Turn Them Over
By Mike Parnos, Investing With Attitude

When you turn over a new leaf, there's no telling what you might 
find.  At the very least, there will be slimy creatures that you 
normally find in the bottom of a Tequila bottle or in powder form 
at a holistic pharmacy.  

How long has that leaf has been in place?  What's hiding under 
that leaf?   When you move the leaf, everything is exposed for the 
world to see.  We're not talking about Adam's leaf.  He dropped 
his leaf and, two kids later, the whole family was thrown out of 
the Garden of Eden.  I hope it was fun because that's a heavy 
price for a little procreation.

Losing Baggage At The Airport Ain't All Bad
We all have baggage.  The real world is no different than the 
trading world.  In a new relationship, both people bring baggage – 
plenty of it.  It may not be visible immediately, but once some of 
the leaves are moved, watch out!   

In life relationships, baggage may take the form of credit card 
debt, an ex-spouse or two, or perhaps a mother at the end of a 
very short umbilical cord.   Some have all three.  Now that's 
scary!  In the trading world you might be a buy-and-holder, a put 
or call buyer, or someone who trades based on advice from brokers 
or uncle Manny.   You know uncle Manny.  He's the one with a metal 
plate in his head.  When he walks through the kitchen, all the 
magnets from the refrigerator fly at him.  Before these people can 
learn the right way to trade, they need an exorcism.  

When I get a new student, he's going to think he joined the 
Marines.  At boot camp, the Marines will break you down to the 
bare essentials and build you back up into a lean mean fighting 
machine.  I hope to create lean mean intelligent traders – who are 
armed with logic, an arsenal of strategies, and the courage to 
pull the trigger when necessary.  First, they need to flush away 
the remnants of their baggage and start with a fresh bowl.

So, it's the beginning of a new year.  It's time to turn over that 
leaf, bare your trading souls and take a long hard look in the 
mirror – as scary as that may sound.  As a student of the Couch 
Potato Trading Institute, you're being provided the wisdom of the 
ages (OK, maybe a slight exaggeration).  But, you must admit, it's 
pretty good stuff.  Learn it.  Use it.
______________________________________________________________

Thoughts On Our QQQ ITM Strangle –
The QQQs hit a high of $36.79.  CPTI students were asking how far 
we should go until we adjust the ITM Strangle.  Currently, the 
range is $29 to $39.  Here is the thinking process when evaluating 
a position and deciding on making (or not making) adjustments.

What are we risking by not adjusting now?  The further the QQQs 
move up, the deeper the short call goes in the money, the less 
ability we will have to make money the following month when we 
roll out the short call.  The short call will be expensive to buy 
back and the next month option will be almost all-intrinsic value.

For instance:  As of Friday's closing prices, the QQQs were 
$36.36.  Our short January $34 call would cost $2.55 to buy back.  
If we rolled it out to the short February $34 call, we'd take in 
about $2.85.  That's a credit of only $.30 of time premium.  What 
needs to be weighed here is whether to take the $.30 on the call 
side or wait for that "overdue" pullback that may never come.

When we're buying back the January $34 call for $2.55, we're 
paying $2.36 of intrinsic value plus $.19 of time value.  Over the 
next two weeks, we know that $.14 of the $.19 will erode away.  
Time premium in the February $34 call will also be eroding, but at 
a much slower rate.

On the put side, we're faced with a similar scenario.  It would 
cost about $.15 to buy back the short January $34 put.  This $.15 
is all time value and will erode away entirely over the next two 
weeks.  Today, we could buy it back and roll it out to the 
February $34, currently selling at $.45.  That would provide us a 
credit of $.30.

Adding the $.30 on the call side and $.30 on the put side would 
give us a $.60 credit for the February option cycle.  It's 
acceptable, but if the QQQs pull back – even a point or two – we 
could easily double the $.60 credit for the February cycle.  Is it 
worth the wait?  Since our CPTI portfolio positions are also 
educational vehicles, we'll hold on and ride the wave further.  I 
know it's a little like picking a direction, but the risk is 
minimal – and maybe we'll all learn something.

In upcoming columns we'll take a look at the positives and 
negatives of rolling out to different strike prices – other than 
the ones that were sold short the month before.
______________________________________________________________
 
The Check-list Is In The Mail -- Soon
CPTI students love checklists.  It's always nice to have something 
that makes our life a little easier.  That's the purpose of our 
checklists.  I'm currently working on a checklist that will aid in 
the calculations of our monthly ITM Strangle rollouts and 
potential range change adjustments.  I'll keep you posted when it 
will be ready for distribution. 

Up Up And Away
I will be on a short trip and not have access to my OI email from 
Monday through Thursday of this week.  Don't hesitate to send your 
questions and/or comments.  I will begin responding on Friday when 
I return.  
_____________________________________________________________

JANUARY CPTI POSITIONS
Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1463.60
We sold 5 NDX January 1500 calls and bought 5 NDX January 1525 
calls for a credit of $3.70 (x 5 = $1,850).  Then we sold 5 NDX 
January 1325 puts and bought 5 NDX January 1300 puts for a credit 
of $2.40 (x 5 = $1,200). The total credit was $6.10.  Maximum 
profit range: 1325 – 1500.  Potential profit: $3,050.

Position #2 – SOX (Semiconductor Index) – Iron Condor – 504.85
We sold 10 SOX January 530 calls and bought 10 SOX January 540 
calls for a credit of $1.40 (x 10 = $1,400).  Then we sold 7 SOX 
January 440 puts and bought 7 SOX January 425 puts for a credit of 
$1.35 (x 7 = $945).  Our total credit was $2,345.  Maximum profit 
range: 440 – 530.  Potential profit: $2,345.

Position #3 – XAU (Gold/Silver Index) – Iron Condor – $109.48
We sold 10 XAU January $95 puts and bought 10 XAU January $90 puts 
for a credit of $.60 ($600).  Then we sold 10 XAU January $110 
calls and bought 10 XAU January $115 calls for a credit:  $.60 
(600).  Our total credit was $1.20 ($1,200).  Maximum profit 
range: $95 – 110.  Potential profit: $1,200.   

Position #4 -- QQQ Diagonal Calendar Spread -- $36.36
I'm a glutton for punishment, but there's a little voice telling 
me that we should be positioned to take advantage of a pullback in 
the market.  We tried this in November – January and we ended up 
losing a dime.  Sooner or later we're going to be right.  So, 
let's give it another try.  We're going to start out risking a 
buck and we have two additional months to sell against the March 
long puts to reduce our cost basis while we wait.  It's a cheap 
speculation. We'll consider this an ongoing position.
We bought 10 QQQ March $34 puts for $1.20 and sold 10 QQQ January 
$33 puts for $.20.  Our total debit: $1.00 ($1,000).
_________________________________________________________________

ONGOING POSITION
QQQ ITM Strangle – Ongoing Long Term -- $36.36
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.   We're 
going to make money by selling near term puts and calls every 
month.  Here's what we've done so far:
October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. 
November: Nov. $34 puts and calls – credit of $1,150. 
December: Dec. $34 puts and calls – credit of $1,500.
January: Jan. $34 puts and calls – credit of $850.

Note:  We haven't included any of the proceeds from this long term 
QQQ ITM Strangle in our profit calculations.  It's a bonus!  And 
it's a great cash flow generating strategy.

OEX Credit Spread Boogie – 549.99
We sold 2 December OEX 520 calls @ $9.00 and bought 2 December OEX 
545 calls @ $1.55.  Total credit of $7.45 ($1,490).  Exposure 
$17.55 ($3,510).  Rolled out to five contracts of the January 
535/505 bull put spread.  In the process we took in an additional 
$280.   Total potential profit of $1,770.  Looking good.  We want 
the OEX to finish above 535.
_________________________________________________________________

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.


**************
FUTURES CORNER
**************

A New Year's Projection (Resolution)
by Keene Little

I've been doing a little end-of-year review to see what I've 
learned from the past year. The bottom line is that I've learned 
it's very hard to pick a top. But I can't say my New Year's 
resolution will be to no longer try to pick a top. That's what I 
do--I try to identify turning points and trade them. I follow 
Elliott Wave Theory to do the bulk of my technical analysis and 
as most Elliotticians this past year, I got skunked waiting for 
the top. I missed a lot of the rally, and I got stopped out a lot 
trying to short the "top". The EW pattern kept showing a complete 
count and it was backed up by other technical indicators that 
showed bearish divergences, overbought indicators, excessive 
bullishness, low VIX, etc. However, the market just kept climbing 
after minor pullbacks and after blowing me a big raspberry. I 
continue to believe we're very close to the top of this rally, 
but I admit that at this point I'm uncomfortable every time it 
looks like we're at a top. I've been conditioned to believe we're 
really not going to see a decline (call me jaded), and my trade 
Friday demonstrated that. I shorted what looked like a perfect 
top and then covered early because I've been conditioned to think 
any hesitation means another rally is coming. Therefore, this 
year-end review is necessary to help me stay objective--to trade 
objectively not emotionally.

Over the recent past I've talked about and posted several daily 
charts that show the ascending wedge, or ending diagonal, that 
has been forming since the rally from early August 2003. In the 
EW count, this ending diagonal looked to be the last leg, wave-5, 
of the move up from March 2003. Ending diagonals are typical as 
the last wave when you've had a move that has gone too far too 
fast. So it seemed logical that the EW count was showing the 
rally was coming to an end. Unfortunately, ending diagonals are 
one of the more difficult patterns to count--it's filled with 
corrective (overlapping) movements, both up and down, and 
corrective patterns are very difficult to predict turning points 
and therefore to trade. These corrective moves are labeled (a)-
(b)-(c) in the SPX daily chart below.


 

Once price went above the trend line that marked the top of this 
ending diagonal (the top purple line), it looked like a classic 
"throw-over" that typically marks the last move in these ending 
diagonals. But now with the rally continuing, the throw-over has 
just kept going. At some point one has to ask the question when 
does a throw-over become a breakout? I've been asking that 
question a lot lately. One look at the SPX daily chart shows a 
throw-over that has clearly exceeded a "normal" amount. Don't ask 
me to define normal (especially in this market!). Like all other 
technical analysis, you need to use some subjective analysis and 
when looking at an EW pattern, it has to pass the "smell" test in 
order to give the count some credibility. The EW pattern I've 
been following is starting to get smelly. No EW rules have been 
violated so it's still valid, but it's worrying me.

I don't want to lose sight of the meaning of this corrective 
rally--it is yet another sign this rally is not the start of a 
new bull market, so expecting a top, soon, is the right thing to 
do. As for going long, the overlapping nature of the rally made 
it incredibly difficult to gain confidence that the market had 
much more rally potential, and this has been going on for the 
past 5 months. Hence the frustration for those of us who "missed" 
the rally. We've had plenty of good short signals with all the 
bearish divergences, but we know how well they've panned out this 
year.

I've been looking at different labels for this rally so that I 
can try to get a clearer sense of where this is going. There are 
several possibilities but it appears it's going to be one of 
those times it won't become obvious until it's in the rear view 
mirror. One thing to remember is that the kind of correction that 
we're forming (correcting the 2000-2002 decline) could actually 
make new highs (so above DOW 11,750) and STILL be just a 
correction. In other words, we will still be due another, and 
stronger, leg down in this secular bear market that will take us 
to new bear market lows. But that doesn't help us in the 
immediate term. 

For now I'm not drastically changing the labels of my wave count 
and looking at the SPX 120-min chart shows some trend lines and 
an initial fib target of 1123. 


 

I was expecting a pullback first, and the drop into Friday's 
close might have been it. The correction might go sideways on 
Monday before getting the next high. It's even possible we've 
already seen the high and we'll start the decline next week. This 
chart shows my projection for early next week.

If the market blows through this 1123 level, which means the DOW 
would be approaching 10,600, then I'm going to start thinking 
more seriously about a much stronger rally ahead of us. I was 
going to show some charts with more bullish counts but I thought 
that might only confuse the picture. But it's possible to count 
the wave structure such that we've started a 5-wave move from the 
November 21st low and that we're only completing the third wave 
of it now. That would mean a correction, which could be steep, 
and then another push higher, possibly into the middle or end of 
January. But even with this more bullish count, it shows we're 
very close to the top of this market. So we need to watch the 
declines from here to tell us if it's corrective or impulsive. If 
it begins to look corrective, then we'll take a look at the more 
bullish potential.

I mention the more bullish potential only to give a heads up that 
you should be careful with bearish positions. Option positions 
may see a lot of time decay waiting for this market to get 
started to the downside.

It's interesting to note on the DOW daily chart the downtrend 
line from January 2000 through the high in May 2001. This is 
currently running through about 10,575. This is also the location 
of a fib projection for a potential wave count that would help 
explain this corrective advance from August. And as can be seen 
in the chart, this area is also the top of the up-channel that 
has contained price action since last April.


 

Looking in a little closer, the DOW 120-min chart shows the trend 
lines containing the rally during most of December:


 

The top of this channel also lines up with the long-term 
downtrend line from January 2000. Again, the rally may have 
finished on Friday, but this 10,575 area looks too inviting for 
the market to not at least attempt to touch it. As with the SPX, 
if we blow through this area to the upside, then I will need to 
relabel my wave count but I think it's currently premature to do 
that. As noted on the chart, once the decline gets underway, 
we'll be able to tell from its structure whether it's corrective 
or impulsive, which will in turn give us a better clue as to 
whether or not we've made a top.

One look at the NDX daily chart and it doesn't take a lot of 
convincing to see that this is one ugly overlapping mess:


 

No impulsive action in there since early summer. This EW pattern 
can be labeled several different ways and not be wrong. I show 
one potential count which shows a triangle 4th wave finished in 
early December and that we're in the final 5th wave. This lines 
up with the other indexes.

I show the two possible scenarios if we have a little more rally 
ahead of us. The first is to 1497 which is a fibonacci target by 
two degrees of the EW pattern (see the 60-min chart below for the 
same target). Instead we might get a little larger pullback 
before launching higher in what I believe would then be the last 
high. This would also line up the oscillators to potentially show 
a bearish divergence, which it currently does not show.

The NDX 60-min chart zeroes in on the potential short-term 
action:


 

Again, using trend lines and fibonacci targets, I can see 1497 as 
being the top of the rally. Depending on the pullbacks 
(corrective or impulsive) and if we rally much higher than 1500, 
I will then be looking at the higher fibonacci target of 1520 
area. But before that level was reached, I would expect to see a 
larger pullback first.

So, this was a long-winded way of saying the short-term holds a 
little (a lot?) more upside potential in my book (I'm thinking 
10,575 for the DOW, 1123 for SPX and 1497 for NDX). This is by no 
means a given, just a potential target. But, to keep things in 
perspective and just to give you an idea of further rally 
potential, the 50% retracement of the 2000-2003 decline in the 
SPX is 1160, and the 78.6% retracement (the "line in the sand") 
for the DOW is 10,775. But it's also possible that the market 
peaked as of Friday morning's high. This pattern remains 
incredibly difficult to predict and trade due to its overlapping 
nature. This is highly unusual behavior in the market for the 
length of time we've been in this kind of corrective pattern, but 
it's looking like we're very close to the end of it. In the 
meantime, the worst thing we can do is force trades because we're 
anxious to trade. When we start back down, and start to see some 
impulsive waves down, we will again have a much easier time 
trading. Be patient and save your capital. You don't want to be 
in the position where the market will finally be easier to trade 
but you've run out of trading capital. Let's all have a good year 
together.

As a final note, the interesting thing about the near-term 
targets (10,575/1123/1497) is that they project to be hit by 
early Tuesday, January 6th. Those who follow cyclical studies 
will note that for the past two years the market has made major 
turns at 68-day cycles (2 times 34, 34 being a fibonacci number). 
The next cycle date is January 6th. Have a great weekend and 
let's see what we can do together with this market. I'll see some 
of you on the Futures Monitor early Monday morning.

Keene Little


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The Option Investor Newsletter                   Sunday 01-04-2004
Sunday                                                      5 of 5


In Section Five:

Covered Calls: Understanding Market Trends
Naked Puts: Q&A With The Editor
Spreads/Straddles/Combos: A New Year Begins!
Market Posture: Anyone's Game


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*************
COVERED CALLS
*************

Trading Basics: Understanding Market Trends
By Mark Wnetrzak

One of our readers asked for my thoughts on the potential for
a "January Effect" in the coming weeks.


Attn: Markw@OptionInvestor.com
Subject: Buy small-caps now?

Hi Mark,

I have been reading about the "January Effect" in my Traders
Almanac and I was curious as to your opinion on this strange
yearly occurrence.  One note I read said that it is based on
tax-selling (for losses against capital gains), which generally
affects small-caps more than large caps, but it also mentioned
that the effect has been less evident in recent years because
the market has factored this process into share values.

Another thing I found out is that the tax year for most mutual
funds ends in October, so much of the tax-based selling in that
group is over long before December arrives.

Any thoughts on this subject?
 
Thanks,

FB


Regarding the "January Effect" and market trends:

Indeed, it's that time of the year to start thinking about the
historical trading relationship between small-cap and large-cap
stocks.  Some experts refer to this phenomenon as the "January
Effect" and although the change is sometimes barely noticeable,
generally the big-cap stocks outperform smaller issues from the
middle of November through December, due to profit-taking in
lower priced shares.  As the new year approaches, many investors
transition to small-cap companies and the trend reverses.  The
historically strong performance of small-cap stocks in the first
few months of the year is well known and easily proven.  The less
obvious cycle in November and December is often more profitable
as the majority of market players don't use the trend to their
advantage, thus leaving the effect intact for those who are aware
of its existence.  Some of the traders that participate in this
strategy are debating whether or not the recent market rally has
skewed the cycle this year but regardless of the final outcome of
the "January Effect" in 2004, history suggests the first five days
of this month will determine the market's direction in the coming
year.  In fact, January has predicted the annual course of the S&P
500 Index with remarkable accuracy, achieving a perfect record of
forecasting the market's direction in odd-numbered years.  Since
1950, almost every time the month of January has ended negative, a
bear market followed, and there is no reason to discount the trend
this year.  With that outlook in mind, investors would be wise to
monitor the activity in the market closely over the next few weeks,
before committing to any long-term positions.

Trade Wisely!



SUMMARY OF PREVIOUS CANDIDATES
*****

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Note:  Margin not used in calculations.

Stock   Price   Last    Option    Price   Gain  Potential
Symbol  Picked  Price   Series    Sold   /Loss  Mon. Yield

NGEN     7.50   11.69  JAN  7.50  0.90    0.90*  19.8%
NEOL    17.71   17.96  JAN 17.50  1.00    0.79*   6.8%
WIND     7.48    9.15  JAN  7.50  0.50    0.52*   6.5%
DGIN    25.08   25.10  JAN 25.00  1.10    1.02*   6.2%
CE      13.50   14.74  JAN 12.50  1.80    0.80*   5.9%
SANM    12.56   12.56  JAN 12.50  0.70    0.64*   5.9%
ACF     15.58   15.87  JAN 15.00  1.15    0.57*   5.7%
ELNK    10.33   10.51  JAN 10.00  0.70    0.37*   5.6%
TKTX    15.35   15.60  JAN 15.00  1.25    0.90*   5.5%
PCS      5.06    5.62  JAN  5.00  0.30    0.24*   5.5%
SKX      7.54    8.16  JAN  7.50  0.40    0.36*   5.5%
UTHR    23.20   23.48  JAN 22.50  1.75    1.05*   5.3%
NTIQ    12.53   13.54  JAN 12.50  0.85    0.82*   5.1%
VTS     10.05   10.60  JAN 10.00  0.55    0.50*   4.6%
UAIR     6.20    6.21  JAN  5.00  1.40    0.20*   4.5%
RHAT    18.88   18.37  JAN 17.50  1.90    0.52*   4.4%
MYGN    12.75   13.58  JAN 12.50  0.85    0.60*   4.4%
MYGN    12.76   13.58  JAN 12.50  0.95    0.69*   4.2%
CNH     15.27   16.63  JAN 15.00  0.95    0.68*   4.1%
CHTT    18.06   18.79  JAN 17.50  1.20    0.64*   4.1%
EMBT    15.98   15.69  JAN 15.00  1.65    0.67*   4.1%
RHAT    17.49   18.37  JAN 15.00  3.00    0.51*   3.8%
OSTK    20.90   19.14  JAN 17.50  3.80    0.40*   3.4%
XING    10.66    9.55  JAN 10.00  1.35    0.24    1.9%

* Stock price is above the sold striking price.


Comments:

Well that wasn't a very auspicious market day for the first 
trading day of the new year, or the January barometer.  (The
theory behind the January barometer is that the direction of
the S&P 500 during the month of January foretells the trend
for the entire year).

Next week should be exciting indeed!  As for the covered-call
portfolio, Nanogen (NASDAQ:NGEN), a new candidate for this
week, exploded higher at Monday's open and probably would've
required a "leg-in" (buy the stock and sell the call later)
approach, which still would have created some call-seller's
remorse as the stock raced higher all week.  Two stocks that
were previously worrisome; Qiao Xing (NASDAQ:XING) and Myriad
Genetics (NASDAQ:MYGN) finished the week on a bullish note.
Hopefully, the upside activity will carry through into next
week.

Positions Previously Closed:  None

 
NEW CANDIDATES
*********

Sequenced by Target Yield (monthly basis)
*****
Stock   Last   Option    Option  Last  Open   Cost  Days Target
Symbol Price   Series    Symbol  Bid   Int.   Basis Exp. Yield

PLUG    7.48  JAN  7.50  PQL AU  0.30  586     7.18  14   9.1%
ARRS    7.52  JAN  7.50  AQC AU  0.30  683     7.22  14   8.4%
CHU    10.05  JAN 10.00  CHU AB  0.35  4307    9.70  14   6.7%
FMKT    7.74  JAN  7.50  FAQ AU  0.45  670     7.29  14   6.3%
NGEN   11.69  JAN 10.00  QEM AB  1.95  1110    9.74  14   5.8%
HPC    12.58  JAN 12.50  HPC AV  0.40  1299   12.18  14   5.7%


Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

*****
PLUG - Plug Power  $7.48  *** Fuel Cell Speculation  ***

Plug Power (NASDAQ:PLUG) designs, develops and manufactures on-
site electric power generation systems utilizing proton exchange
membrane (PEM) fuel cells for stationary applications.  Plug is
focused on fuel-cell systems with electrical output of 1 to 100
kilowatts (kW), fueled by natural gas, liquid petroleum gas (LPG)
and hydrogen gas, for a variety of stationary applications.  The
company is developing an architected technology platform from
which it expects to offer multiple point products, ranging from 
direct current (DC) back-up power for telecom applications, to
alternating prime power for residential and light commercial 
applications.  Plug Power has been forging a Stage I base near
$5 for over a year and recently has started to move higher on
heavy volume.  Investors can use this short-term position to
speculate on the company's future share value.

JAN-7.50 PQL AU LB=0.30 OI=586 CB=7.18 DE=14 TY=9.1%


*****
ARRS - Arris Group  $7.52  *** Stepping Higher  ***

Arris Group (NASDAQ:ARRS) develops and supplies equipment and
technology for cable system operators and other broadband service
providers.  The company specializes in developing advanced cable
telephony equipment, enabling the delivery of converged services
(voice, video and data) through broadband local access networks,
and designing and engineering hybrid fiber-coax architectures.
The firm's complete solutions for Internet protocol and optical
transport allow broadband service providers to deliver a range of
integrated voice, video and data services to their subscribers.
The company's product offerings are divided into three categories:
broadband, transmission, optical and outside plant, and supplies
and services.  Arris continues to recover from last year's low
and has now made another 52-week high on robust volume.  Investors
who have a bullish outlook for the company can use this short-term
position to establish a reasonable cost basis in the issue.

JAN-7.50 AQC AU LB=0.30 OI=683 CB=7.22 DE=14 TY=8.4%


*****
CHU - China Unicom  $10.05  *** China Speculation! ***

China Unicom (NYSE:CHU) is a telecommunications operator in China,
offering a wide range of telecommunications services, including 
cellular, international and domestic long-distance, data, Internet
and paging services.  The controlling shareholder, Unicom Group,
has the exclusive license to offer CDMA cellular services in China
and has constructed CDMA networks nationwide.  The company has
leased capacity on the network and operates the CDMA network in
the cellular service areas.  We simply favor the volume-supported
move on Friday that suggests China Unicom's consolidation phase
is ending.  Investor's who agree can profit from that outcome with
this short-term speculative position.

JAN-10.00 CHU AB LB=0.35 OI=4307 CB=9.70 DE=14 TY=6.7%


*****
FMKT - FreeMarkets  $7.74  *** Bottom Fishing  ***

FreeMarkets (NASDAQ:FMKT) offers software, services and information
to help companies improve their sourcing and supply management
processes and enhance the capabilities of their supply management
organization.  The company's customers are buyers of industrial
parts, raw materials, commodities and services.  FreeMarkets' 
solutions combine software, services and information to address
the global supply management market.  The company serves its
customers from 18 locations in 14 countries on five continents.
FMKT has been forging a Stage I base for over a year and the
stock's share price has recently moved above its 150-day MA.  
The stock appears poised to move higher in the coming sessions
and traders who believe the issue is destined for a future rally
can profit from upside movement in FMKT with this position.

JAN-7.50 FAQ AU LB=0.45 OI=670 CB=7.29 DE=14 TY=6.3%


*****
NGEN - Nanogen  $11.69  *** New Patent = Rally Mode  ***

Nanogen (NASDAQ:NGEN) develops and commercializes molecular
diagnostics products and tests for the gene-based testing
market for sale primarily in the United States, Europe and the
Pacific Rim.  By integrating microelectronics and molecular
biology into a core proprietary technology platform, Nanogen
seeks to establish the open-architecture design of its primary
products, the NanoChip Molecular Biology Workstation and the
NanoChip Cartridge (collectively, the NanoChip System) as the
standard platform for molecular identification and analysis. 
The firm also develops specific reagents and other commercial
applications for the NanoChip System.  The company continually
conducts research and development by itself and also with its
subsidiary and third parties, to improve the NanoChip System
and to extend its technology to other applications such as 
biodefense, forensics and drug discovery (protein kinases).
Early last month, Nanogen about doubled after the company
said it received a patent for a method to build nanodevices;
atom or molecule-sized electronic devices.  We simply favor the
break-out on heavy volume and speculators who believe the firm's
shares are destined to move higher can "target-shoot" an entry
point in the issue with this short-term position.

JAN-10.00 QEM AB LB=1.95 OI=1110 CB=9.74 DE=14 TY=5.8%


*****
HPC - Hercules  $12.58  *** On The Move! ***

Hercules (NYSE:HPC) is a manufacturer and marketer of specialty 
chemicals and related services for various business, consumer
and industrial applications.  The company's principal products
are chemicals used by the paper industry to increase product
performance and enhance the manufacturing process; water-soluble
polymers; specialty resins, and polypropylene and polyethylene
fibers.  The primary markets Hercules serves include pulp and
paper, food, personal care, paints and coatings, construction
materials, adhesives, pharmaceuticals and oil and gas drilling
and recovery.  The company operates through two segments and
four divisions.  The performance products segment is comprised
of Pulp and Paper and Aqualon.  The engineered materials and 
additives segment is composed of FiberVisions and Pinova. 
Hercules recently broke through resistance around $12 (which 
should now offer support) and made another new 52-week high.
Investors can use this short-term position to speculate on the
future movement of the company's stock price.

JAN-12.50 HPC AV LB=0.40 OI=1299 CB=12.18 DE=14 TY=5.7%


*****


*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************

The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary.

Sequenced by Target Yield (monthly basis)
*****
Stock   Last   Option    Option  Last  Open   Cost  Days Target
Symbol Price   Series    Symbol  Bid   Int.   Basis Exp. Yield

RMBS   30.55  JAN 30.00  BNQ AF  2.00  20136  28.55  14  11.0%
WFII   15.06  JAN 15.00  QUU AC  0.60  430    14.46  14   8.1%
REGN   15.05  JAN 15.00  RQP AC  0.55  153    14.50  14   7.5%
TRDO   22.51  JAN 22.50  UNC AX  0.70  78     21.81  14   6.9%
THER   20.20  JAN 20.00  UKT AD  0.80  2153   19.40  14   6.7%
NSCN   25.36  JAN 25.00  QKN AE  0.95  1326   24.41  14   5.3%
EDO    25.01  JAN 25.00  EDO AE  0.60  132    24.41  14   5.3%
FLEX   15.05  JAN 15.00  QFL AC  0.35  34401  14.70  14   4.4%
TIVO    7.87  JAN  7.50  TUK AU  0.50  8727    7.37  14   3.8%




*****************
NAKED PUT SECTION
*****************

Options 101: Q&A With The Editor
By Ray Cummins

One of our new readers offered some excellent questions about the
different sections of the newsletter.


Attn: Contact Support
Subject: New to the newsletter

Ray,

Last week I signed up for the annual subscription and I have been
looking at some of your articles since put-selling is one of my
portfolio strategies.  The first question I have is about the
naked puts listed on Wednesday and Sunday.  Are there any big
differences between the two sections?  It seems like Sunday's
stocks are a bit lower priced but I didn't see any other major
difference between the two.  Also, I was wondering if you had
a guide to using the web-site; something like explanations of
the various play lists and strategies as well as details about
the specific resources available for traders.

Anyway, it looks like a lot of information to take in but I
expect to be "in the money" when the end of next year rolls
around!

Thanks,

WE
  

Hello WE,

One comment we probably receive more than any other (at the OIN)
relates to the "overwhelming" amount of information on the website.
In fact, the complaints in this area has been so numerous that we
are finally starting to create a comprehensive description of all
the sections and the supporting resources that readers can use in
their search for candidates in the various stock & option trading
strategies.  Of course, this task will take some time to complete
but when it is done, the information will be at this link:

http://www.OptionInvestor.com/websiteguide/index.asp

Regarding your question about the mid-week and week-end sections:
When I first started publishing plays on Wednesday, there was a
considerable difference between the positions offered in the
"Premium-Selling," "Conservative," and "Supplemental" play-lists.
However, I think it is safe to say that over the last year or so,
all of the sections have migrated towards a point where they are
simply groups of candidates to help you "narrow the field" with
regard to possible trades.  Indeed, the positions in the mid-week
(Premium-Selling) section are generally above $20 and the plays
published in the week-end edition of the OIN may be somewhat more
conservative (for newer traders?), but I would treat all of them
with the same caution and prudent consideration that I afford any
issue when performing due-diligence on a potential portfolio
holding.  As the disclaimer says:

"The following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook."

One thing I have learned over the years: Readers who understand
that we simply provide tools, resources and candidates for stock
and option trading are rarely disappointed with their subscription
to the OIN.

Ray


                        
SUMMARY OF PREVIOUS CANDIDATES 
*****

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Stock   Price   Last    Option    Price   Gain   Simple  Max
Symbol  Picked  Price   Series    Sold   /Loss   Yield  Yield

MERX    24.75   24.85  JAN 22.50  0.60    0.60*   4.0%  10.5%
THER    18.77   20.20  JAN 17.50  0.45    0.45*   3.8%   9.5%
PDLI    16.65   18.42  JAN 15.00  0.45    0.45*   3.4%   9.0%
SOV     23.70   23.67  JAN 22.50  0.90    0.90*   3.6%   8.5%
PLMD    26.45   26.69  JAN 22.50  0.50    0.50*   2.5%   7.6%
MERX    24.45   24.85  JAN 20.00  0.40    0.40*   2.2%   7.6%
BLTI    17.19   19.15  JAN 15.00  0.25    0.25*   2.5%   7.3%
SHRP    32.39   32.20  JAN 30.00  0.55    0.55*   2.7%   7.2%
IPG     15.45   15.52  JAN 15.00  0.40    0.40*   3.0%   7.1%
IMCL    40.01   39.98  JAN 35.00  0.55    0.55*   2.3%   6.9%
SLXP    21.50   22.09  JAN 20.00  0.60    0.60*   2.7%   6.8%
ATVI    18.65   18.79  JAN 17.50  0.30    0.30*   2.5%   6.6%
JNS     15.91   16.70  JAN 15.00  0.35    0.35*   2.6%   6.6%
NPSP    32.64   31.36  JAN 30.00  0.80    0.80*   2.4%   6.2%
BLTI    14.01   19.15  JAN 12.50  0.30    0.30*   2.1%   5.9%
WEBX    20.18   20.32  JAN 17.50  0.30    0.30*   1.9%   5.7%
AAII    25.00   25.11  JAN 22.50  0.30    0.30*   2.0%   5.6%
RMBS    30.66   30.55  JAN 20.00  0.40    0.40*   1.8%   5.3%
AAII    25.01   25.11  JAN 22.50  0.45    0.45*   1.8%   4.9%
EMMS    27.17   27.59  JAN 25.00  0.50    0.50*   1.8%   4.7%

* Stock price is above the sold striking price.


Comments:

The 2003 holiday season came to an end Friday with stocks closing
mixed despite favorable economic data.

Investors enjoyed the first positive year for equities since 1999
and all of the major averages participated in upside activity.
Our portfolio excelled (as it should in a bullish market) and
thankfully, there were very few unfavorable surprises.  Looking
forward, share values should continue to rise gradually throughout
the coming months.  Of course, there will certainly be a necessary
consolidation and even some rotation into specific groups, but the
overall trend remains "bullish" for the foreseeable future.  Among
the new plays, Therasense (NASDAQ:THER) did not offer the target
credit due to its gap-up at the opening bell on Monday.  However,
the available credit was viable for conservative traders.  NPS
Pharmaceuticals (NASDAQ:NPSP) is the only issues on the "watch"
list.
 
Previously Closed Positions: None


WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL!
*****

The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.


MARGIN REQUIREMENTS

The Initial Margin is the amount of collateral you must have in
your account to initiate the position.  In specific terms, margin
refers to cash or securities required of an option writer by his
brokerage firm as collateral for the writer's obligation to buy
or sell the underlying interest if assigned through an exercise.
The Maintenance Margin is the amount of cash (or securities)
required to offset the changing collateral requirements of the
written options in your portfolio.  As the price of the option
and the underlying stock changes, so does the maintenance margin.
With (short) put options, the margin requirements can increase
when the underlying stock price declines and also when it rises
significantly.  The reason is the manner in which the collateral
amount is determined (with the formula listed above) and traders
should always consider not only the initial margin requirement,
but also the maximum margin needed for the life of the position.
Option writers occasionally have to meet calls for additional
margin during adverse market movements and even when there is
enough equity in the account to avoid a margin call, the need
for increased collateral will make that equity unavailable for
other purposes.  Please consider these facts carefully before
you initiate any "naked" option positions.

For more information on margin requirements, please refer to:

http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf


MONTHLY YIELD: MAXIMUM & SIMPLE

The Maximum Monthly Yield (listed in the summary and with each
new candidate) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The Simple Monthly Yield is based on the cost of the underlying
issue (in the event of assignment), including the premium from
the sold option, thus it reflects the maximum potential loss in
the position.


NEW CANDIDATES
*********

Sequenced by Maximum Yield (monthly basis - margin)
*****
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

CYD    32.22  JAN 30.00  CYD MF 0.65 1407 29.35  14   4.8%  12.5%
JNPR   19.68  JAN 19.00  JUX MT 0.40 1950 18.60  14   4.7%  11.4%
PDLI   18.42  JAN 17.50  PQI MW 0.35 529  17.15  14   4.4%  11.2%
SIL    21.10  JAN 20.00  SIL MD 0.30 209  19.70  14   3.3%   8.5%
BDY    26.72  JAN 25.00  BDY ME 0.35 876  24.65  14   3.1%   8.2%
SMMX   21.15  JAN 20.00  OFU MD 0.25 220  19.75  14   2.8%   7.2%


Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without
margin), MY-Maximum Yield (monthly basis - using margin).

*****
CYD - China Yuchai  $32.22  *** China Rally Resumes! ***

China Yuchai International (NYSE:CYD) is a medium-duty diesel
engine manufacturer in China that also produces diesel power
generators and diesel engine parts.  The company owns a major
interest in Guangxi Yuchai Machinery and owns, through various
subsidiaries, 76.4% of the outstanding common shares of Yuchai.
Yuchai primarily makes and sells diesel engines for medium-duty
trucks in China.  Yuchai's primary products are its 6105QC and
6108 medium-duty engines, which are used in medium-duty trucks.
In addition, Yuchai also offers the 4-Series light-duty engines
and the 6112 heavy-duty engines.  Besides diesel engines, Yuchai
produces a limited number of diesel power generators and diesel
engine parts.  China-related stocks are "hot" again and traders
can profit from additional upside activity in the group with
this position.

JAN-30.00 CYD MF LB=0.65 OI=1407 CB=29.35 DE=14 TY=4.8% MY=12.5%


*****
JNPR - Juniper Networks  $19.68  *** Rally Mode! ***

Juniper Networks (NASDAQ:JNPR) is a provider of Internet infra-
structure solutions that enable Internet service providers and
other telecommunications service providers to meet the demands
resulting from the growth of the Internet.  Juniper's Internet
routers are designed and purpose-built for service provider
networks and offer performance, scalability, interoperability
and flexibility, as well as lower complexity and cost compared
to legacy alternatives.  Juniper's proprietary software is
designed for the Internet protocol network routing, operations
and control requirements of service providers and is an integral
embedded component of its product family system architecture.
Last week, Juniper Networks was awarded a multi-year contract by
Science Applications International to supply all edge and core
IP/MPLS routers under the Defense Department's new Global Grid
Bandwidth Expansion project, which is considered the next step
in the development of the Internet.  Investors were happy with
the news as they pushed the issue to a 2-year high.  Traders
can establish a cost basis below $19 in the issue with this
position.

JAN-19.00 JUX MT LB=0.40 OI=1950 CB=18.60 DE=14 TY=4.7% MY=11.4%


*****
PDLI - Protein Design Labs  $18.42  *** Biotech Speculation! ***

Protein Design Labs (NASDAQ:PDLI) is engaged in the discovery and
development of humanized monoclonal antibodies for the treatment
of various diseases.  The firm's areas of disease focus include
oncology and inflammatory and autoimmune diseases and the company
has several humanized antibodies in clinical development for
inflammatory bowel disease, psoriasis and asthma.  PDLI is fully
integrated from research through clinical development and it
conducts many activities in support of the clinical development
program, including pre-clinical studies, process development and
antibody manufacturing.  The company also has significant research
activities aimed at the discovery of new antibodies that may be
useful for the treatment of certain cancers and autoimmune and
inflammatory diseases.  PDLI recently settled a patent dispute
with Genentech (NYSE:DNA) related to a licensing master agreement
signed between the two firms in 1998 and the current stock price
reflects the renewed optimism among investors since that event.
First Albany analyst David Webber also recently upped his outlook
for the stock to "buy" from "neutral" and traders who think the
bullish activity will continue for the next two weeks can profit
from that outcome with this position.

JAN-17.50 PQI MW LB=0.35 OI=529 CB=17.15 DE=14 TY=4.4% MY=11.2%


*****
SIL - Apex Silver Mines  $21.20  *** Hedge With Silver! ***

Apex Silver Mines (NYSE:SIL) is engaged in the exploration and
development of silver properties in South America, Mexico,
Central America and Central Asia.  The firm has a diversified
portfolio of privately owned and controlled silver exploration
properties.  It has rights to or controls over 100 silver and
other mineral exploration holdings, divided into 34 property
groups, located in or near the traditional silver producing
regions of Bolivia, Mexico, Peru, El Salvador and Kyrgystan.
The firm's exploration efforts have recently produced its first
development property, the San Cristobal Project in southern
Bolivia.  San Cristobal's probable reserves total 219 million
tons of ore containing over 450 million ounces of silver, as
well as 7.8 billion pounds of zinc and 2.9 billion pounds of
lead.  Gold and silver have certainly become popular with the
decline of the U.S. dollar and investors who are interested in
hedging their portfolios with a stock in the Metals and Mining
group should consider this position.

JAN-20.00 SIL MD LB=0.30 OI=209 CB=19.70 DE=14 TY=3.3% MY=8.5%


*****
BDY - Bradley Pharmaceuticals  $26.72  *** On The Rebound! ***

Bradley Pharmaceuticals (NYSE:BDY), along with its subsidiaries,
markets over-the-counter and prescription pharmaceutical and
health related products.  The company's product lines include
dermatological brands, marketed by its wholly owned subsidiary,
Doak Dermatologics, and nutritional, respiratory and internal
medicine brands marketed by its Kenwood Therapeutics division.
Bradley is actively promoting products in dermatology and
gastroenterology, and, to a lesser extent, nutritional markets.
All of its product lines are manufactured and supplied by a
group of independent contractors that operate under the firm's
quality control standards.  Its products are marketed primarily
to wholesalers, which distribute the products to retail outlets
and healthcare institutions throughout the United States and
selected international markets.  BDY shares have been "on the
rebound" in recent weeks and the issue appears to be a good
candidate for a bullish position in the drug sector.

JAN-25.00 BDY ME LB=0.35 OI=876 CB=24.65 DE=14 TY=3.1% MY=8.2%


*****
SMMX - Symyx Technologies  $21.15  *** Next Leg Up? ***

Symyx Technologies (NASDAQ:SMMX) develops and applies high-speed
combinatorial technologies to the discovery of materials for
chemical, life science and electronics applications.  The firm
provides research services to its partners through its Industry
Collaborations business, offers access to select instruments and
software through its Discovery Tools business and licenses its
discovered materials and methodologies through its Licensing
business.  The company is applying its technology to discover
materials for industrial customers in the chemicals, sciences
and electronics industries.  The company's discovery efforts
encompass a broad range of materials, including catalysts for
the manufacturing of chemicals, polymers for life sciences and
phosphors and other materials for electronics uses.  Apparently,
Symyx has recently been labeled a "nanotechnology" company and
Exxon-Mobil may be interested in its products.  If that's the
case, the issue certainly has upside potential as "nano" stocks
are enjoying lots of interest among speculative investors.

JAN-20.00 OFU MD LB=0.25 OI=220 CB=19.75 DE=14 TY=2.8% MY=7.2%


*****


*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************

The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary.

Sequenced by Maximum Yield (monthly basis - margin)
*****
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

NOVN   15.46  JAN 15.00  NPQ MC 0.35 45   14.65  14   5.2%  12.5%
ADLR   20.49  JAN 20.00  UAH MD 0.45 60   19.55  14   5.0%  12.0%
TELK   23.02  JAN 22.50  ZUL MX 0.50 45   22.00  14   4.9%  11.8%
IDCC   21.05  JAN 20.00  DAQ MD 0.40 2430 19.60  14   4.4%  11.2%
HILL   15.65  JAN 15.00  HCQ MC 0.30 1960 14.70  14   4.4%  11.0%
ABS    22.75  JAN 22.50  ABS MX 0.45 380  22.05  14   4.4%  10.5%
XMSR   26.80  JAN 25.00  QSY ME 0.45 8017 24.55  14   4.0%  10.4%
MRO    33.25  JAN 32.50  MRO MZ 0.60 1201 31.90  14   4.1%   9.9%
METHA  12.99  JAN 12.50  QME MV 0.20 19   12.30  14   3.5%   8.9%
UTHR   23.48  JAN 22.50  FUH MX 0.35 20   22.15  14   3.4%   8.7%
MERX   24.85  JAN 22.50  KXQ MX 0.25 60   22.25  14   2.4%   6.9%



SEE DISCLAIMER IN SECTION ONE
*****************************


************************
SPREADS/STRADDLES/COMBOS
************************

A New Year Begins!
By Ray Cummins

Stocks ended mixed on the first day of trading in 2003 after
an early rally on bullish manufacturing data was curtailed by
valuation concerns and national security issues.

The Dow Jones industrial average fell 44 points to 10,409 on
weakness in 3M (NYSE:MMM), IBM (NYSE:IBM), Wal-Mart (NYSE:WMT)
and Boeing (NYSE:BA).  The tech-heavy NASDAQ Composite added 3
points to end at 2,006, in spite of losses in the semiconductor
sector.  The Standard & Poor's 500 Index fell 3 points to 1,108
as declines in retail and banking shares offset gains in basic
material and transportation stocks.  In the broader market, the
number of advancing stocks outnumbered decliners almost 2 to 1
on both the NYSE and the NASDAQ.  Volume was much as expected,
given the holiday season.  On the Big Board, 1.14 billion shares
changed hands while 1.65 billion shares traded on the technology
exchange.  Bonds retreated further with the yield on the 10-year
treasury note closing at 4.37%.

*****************
PORTFOLIO SUMMARY
*****************

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position or to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


PUT CREDIT SPREADS
******************

Symbol  Pick    Last   Month  LP  SP  Credit  CB     G/L   Status

CME     70.63   72.90   JAN   60  65   0.50  64.50   0.50   Open
NCEN    39.62   38.42   JAN   30  32   0.45  32.93   0.45   Open
SII     40.22   41.46   JAN   35  37   0.25  37.25   0.25   Open
CYBX    32.70   32.04   JAN   25  30   0.50  29.50   0.50   Open
INTU    52.16   52.28   JAN   45  47   0.25  47.25   0.25   Open
TRN     31.36   30.86   JAN   25  30   0.75  29.25   0.75   Open
AA      37.30   37.55   JAN   32  35   0.30  34.70   0.30   Open
MTH     65.37   64.97   JAN   60  65   0.45  64.55   0.42   Open
NFLX    51.07   54.83   JAN   40  43   0.25  42.25   0.25   Open
SCHN    59.28   60.75   JAN   45  50   0.55  49.45   0.55   Open

LP = Long Put  SP = Short Put  CB = Cost Basis  G/L = Gain/Loss


CALL CREDIT SPREADS
*******************

Symbol  Pick    Last   Month  LC  SC  Credit  CB     G/L   Status

CERN    39.22   38.51   JAN   50  45   0.55  45.55  $0.55   Open
MDC     64.06   61.82   JAN   70  65   0.60  65.60  $0.60   Open
CL      49.19   49.62   JAN   55  50   0.65  50.65  $0.65   Open
KLAC    55.55   56.44   JAN   65  60   0.55  60.55  $0.55   Open

LC = Long Call  SC = Short Call  CB = Cost Basis  G/L = Gain/Loss

The bearish position in Research in Motion (NASDAQ:RIMM) has
previously been closed for a loss.


CALL DEBIT SPREADS
******************

Symbol  Pick   Last   Month  LC  SC   Debit   B/E   G/L   Status

OSX     89.45  93.57   JAN   80  85   4.40   84.40  0.60   Open
ACDO    31.77  32.67   JAN   25  30   4.40   29.40  0.60   Open
DRIV    25.01  22.56   JAN   20  22   2.15   22.25  0.35  Closed
IMCL    40.76  39.98   JAN   30  35   4.50   34.50  0.50   Open
MCHP    32.90  33.62   JAN   25  30   4.40   29.40  0.60   Open

LC = Long Call  SC = Short Call  B/E = Break-Even  G/L = Gain/Loss

The bullish position in Digital River (NASDAQ:DRIV) should have
been closed by conservative traders when the issue fell below the
break-even price ($22.25).


PUT DEBIT SPREADS
*****************

Symbol  Pick   Last  Month  LP  SP   Debit   B/E   G/L   Status

SYMC    32.42  34.74  JAN   37  35   2.15   35.35  0.35   Open?

Symantec (NASDAQ:SYMC) remains on the "watch" list as the issue
tests resistance near the sold (call) strike at $35.


SYNTHETIC (BULLISH)
*******************

Stock   Pick   Last   Expir.  Long  Short  Initial   Max.   Play
Symbol  Price  Price  Month   Call   Put   Credit   Value  Status

IDCC    19.00  21.05   JAN     25     15     0.20    0.25   Open?
NE      36.09  35.61   JAN     37     35     0.10    0.50   Open?
PTEN    31.34  32.95   JAN     32     30    (0.10)   1.45   Open?
UTHR    23.20  23.48   MAY     30     17    (0.10)   0.10   Open

Patterson-UTI Energy (NASDAQ:PTEN) has already reached the target
gain and Noble (NYSE:NE) achieved a favorable "early-exit" profit
in less than one week.  United Therapeutics (NASDAQ:UTHR) moved
into "profitable" territory for the first time during Monday's
sharp rally.


SYNTHETIC (BEARISH)
*******************

No Open Positions


CALENDAR & DIAGONAL SPREADS
***************************

Stock   Pick   Last     Long     Short    Current   Max.   Play
Symbol  Price  Price   Option    Option    Debit   Value  Status

CEPH    46.34  49.00   FEB-50C   JAN-50C   0.70    1.00    Open
FISV    38.28  39.06   MAR-35P   JAN-35P   0.70    0.60    Open

Cephalon (NASDAQ:CEPH) is trading near maximum profit and any
upside movement (to the sold strike at $50) should increase the
overall credit in the position.


DEBIT STRADDLES
***************

Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

ATN     17.93  19.64   JAN    17    17     2.40    2.75    Open
MYL     25.32  25.12   JAN    25    25     2.25    2.10   Closed
ACL     59.19  59.82   JAN    60    60     3.00    2.80    Open

Mylan Labs (NYSE:MYL) became an "early-exit" candidate last week
when the issue retreated to the sold strike at $25.

           
CREDIT STRANGLES
****************

No Open Positions


Questions & comments on spreads/combos to Contact Support
*************
NEW POSITIONS
*************

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance, and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.

**************
CREDIT SPREADS
**************

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing.  Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.

*****
SINA - SINA Corporation  $37.90  *** China-dot-com Rally! ***

SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an
online media company and value-added information service provider
for China and the global Chinese communities.  With a branded
network of localized Websites targeting China and overseas Chinese,
the company provides an array of services to its users including
region-focused online portals, search, directory, interest-based
and community-building channels, free and premium e-mail, wireless
short messaging, online games, virtual Internet service provider,
classified listings, e-commerce, e-learning, and enterprise
e-solutions.  SINA generates revenue through advertising, various
fee-based services, e-commerce and enterprise services.

SINA - SINA Corporation  $37.90

PLAY (slightly aggressive - bullish/credit spread):

BUY  PUT  JAN-30.00  NOQ-MF  OI=3365  ASK=$0.15
SELL PUT  JAN-35.00  NOQ-MG  OI=1674  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.60-$0.70
POTENTIAL PROFIT(max)=14% B/E=$34.40


*****
SOHU - Sohu.com  $32.70  *** On The Rebound! ***

Sohu.com (NASDAQ:SOHU) is an Internet portal in China.  The firm's
portal consists of sophisticated Chinese language Web navigational
and search capabilities, 15 main content channels, Internet-based
communications and community services, and a unique platform for
e-commerce and short messaging services.  Each of the company's
interest-specific main channels contains multi-level sub-channels
that cover a range of topics; news, business, entertainment, sports
and careers.  The firm also offers free Web-based e-mail.  Sohu.com
offers a universal registration system, and the company's portal
attracts consumers and merchants alike.  One of the key features is
a proprietary Web navigational and search capabilities that reflects
the cultural characteristics and thinking and viewing habits of the
People's Republic of China Internet users.

SOHU - Sohu.com  $32.70

PLAY (slightly aggressive - bullish/credit spread):

BUY  PUT  JAN-25.00  UZK-ME  OI=1462  ASK=$0.10
SELL PUT  JAN-30.00  UZK-MF  OI=1431  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.65-$0.75
POTENTIAL PROFIT(max)=15% B/E=$29.35


*****
YHOO - Yahoo!  $45.40  *** Internet Sector Leader! ***

Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer
services company that offers a comprehensive branded network of
properties and services to more than 200 million individuals
worldwide.  The company offers an online navigational guide to the
Internet via its www.yahoo.com Website, which is a guide in terms
of traffic, advertising and household and business user reach.
Through Yahoo! Enterprise Solutions, the firm also provides many
business services designed to enhance the productivity and Web
presence of its clients.  Yahoo! has offices in the United States,
Europe, Asia, Latin America, Australia and Canada.  

YHOO - Yahoo!  $45.40

PLAY (less conservative - bullish/credit spread):

BUY  PUT  JAN-40.00  YHQ-MH  OI=16525  ASK=$0.25
SELL PUT  JAN-42.50  YHQ-MV  OI=12477  BID=$0.50
INITIAL NET-CREDIT TARGET=$0.25-$0.35
POTENTIAL PROFIT(max)=11% B/E=$42.25


*****
CTX - Centex  $104.40  *** Homebuilding Sector Slump! ***

Centex Corporation (NYSE:CTX) is a multi-industry company with
operates in six principal business segments.  Conventional Homes
operations involve the construction and sale of single-family
homes, town homes and low-rise condominiums, and the purchase and
development of land.  Investment Real Estate operations involve
the acquisition, development and sale of land, and the development
of industrial, office, retail and mixed-use projects.  Financial
Services operations involve the financing of homes, home equity
and sub-prime lending, and the marketing of insurance coverage.
Construction Products involves cement production and distribution,
and the production, distribution and sale of gypsum wallboard,
concrete, aggregates and recycled paperboard.  Contracting and
Construction Services involves the construction of buildings.
Centex HomeTeam Services is involved in pest and termite control,
lawn and landscape care, electronic security, alarm monitoring
and home-wiring services.

CTX - Centex  $104.40

PLAY (less conservative - bearish/credit spread):

BUY  CALL  JAN-115.00  CTX-AC  OI=1737  ASK=$0.20
SELL CALL  JAN-110.00  CTX-AB  OI=1328  BID=$0.65
INITIAL NET-CREDIT TARGET=$0.50-$0.60
POTENTIAL PROFIT(max)=11% B/E=$110.50


*****
IACI - InterActiveCorp  $33.26  *** In A Trading Range? ***

InterActiveCorp (NASDAQ:IACI), formerly known as USA Interactive,
is a multi-brand interactive commerce firm transacting business
worldwide via the Internet, television and the telephone.  Their
portfolio of companies collectively enables direct-to-consumer
transactions across many areas, including home shopping, tickets,
personals, travel, teleservices and local services.  During 2002,
InterActiveCorp completed two major transactions that together
transformed the company.  The firm acquired a majority interest
in Expedia.com and it accomplished the contribution of its
entertainment businesses to Vivendi Universal Entertainment, a
joint venture controlled by Vivendi Universal, S.A.  The firm's
business is organized into three groups: Electronic Retailing;
Information and Services, and Travel Services.

IACI - InterActiveCorp  $33.26

PLAY (less conservative - bearish/credit spread):

BUY  CALL  JAN-37.50  QTH-AU  OI=5628   ASK=$0.10
SELL CALL  JAN-35.00  QTH-AG  OI=11413  BID=$0.35
INITIAL NET-CREDIT TARGET=$0.25-$0.35
POTENTIAL PROFIT(max)=11% B/E=$35.25


*************
RYL - The Ryland Group  $85.08  *** Triple-Top Formation? ***

The Ryland Group (NYSE:RYL) is a homebuilder and mortgage-finance
company.  The company has built more than 190,000 homes during its
34-year history.  Ryland homes are available in more than 260 new
communities in 21 markets across the United States.  In addition,
the Ryland Mortgage company has provided mortgage financing and
related services for more than 165,000 homebuyers.  The company's
operations span all the significant aspects of the home-buying
process, from design, construction and sale to mortgage financing,
title insurance, settlement, escrow and homeowners insurance.

RYL - The Ryland Group  $85.08

PLAY (less conservative - bearish/credit spread):

BUY  CALL  JAN-95.00  RYL-AS  OI=758   ASK=$0.20
SELL CALL  JAN-90.00  RYL-AR  OI=1104  BID=$0.60
INITIAL NET-CREDIT TARGET=$0.45-$0.50
POTENTIAL PROFIT(max)=9% B/E=$90.45


*************
DEBIT SPREADS
*************

These candidates offer a risk-reward outlook similar to credit
spreads, however there is no margin requirement as the initial
debit for the position is also the maximum loss.  Since these
positions are based primarily on technical indications, traders
should review the current news and market sentiment surrounding
each issue and make their own decision about the outcome of the
position.

*****
ATRS - Altiris  $36.84  *** New "All-Time" High! ***

Altiris (NASDAQ:ATRS) offers a range of Web-enabled solutions
that empower organizations to easily manage desktops, notebooks,
handhelds, and Windows, Linux and UNIX servers throughout the IT
lifecycle.  Altiris provides fully integrated, complete systems
management solutions for client and mobile, server, and asset
management.  The company automates, simplifies, and reduces the
cost and complexity of IT lifecycle management with a rapid
return on investment.

ATRS - Altiris  $36.84

PLAY (less conservative - bullish/debit spread):

BUY  CALL  JAN-30.00  QJI-AF  OI=29  ASK=$7.20
SELL CALL  JAN-35.00  QJI-AG  OI=54  BID=$2.70
INITIAL NET-DEBIT TARGET=$4.40-$4.45
POTENTIAL PROFIT(max)=12% B/E=$34.45


*****
AMZN - Amazon.com  $51.90  *** Premium-Selling Only! ***

Amazon.com (NASDAQ:AMZN) is a website where customers can find
and discover anything they may want to buy online.  The company
lists millions of items in categories such as books, music, DVDs,
videos, consumer electronics, toys, camera and photo items, PC
software, computer and video games, tools and hardware, outdoor
living items, kitchen and house-wares products, toys, baby and
baby registry, travel services and magazine subscriptions.  At
its Amazon Marketplace, Auctions and zShops services, businesses
and individuals can sell virtually any product to millions of
customers, and with Amazon.com Payments, sellers are able to
accept credit card transactions in addition to other methods of
payment.  The company operates a U.S.-based Website: amazon.com,
and four internationally focused Websites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr and www.amazon.co.jp.

AMZN - Amazon.com  $51.90

PLAY (less conservative - bearish/debit spread):

BUY  PUT  JAN-60.00  ZQN-ML  OI=2486   ASK=$8.30
SELL PUT  JAN-55.00  ZQN-MK  OI=18284  BID=$3.80
INITIAL NET-DEBIT TARGET=$4.40-$4.45
POTENTIAL PROFIT(max)=12% B/E=$55.55


****************
CALENDAR SPREADS
****************

A calendar spread (or time spread) consists of the sale of one
option and the simultaneous purchase of an option of the same
type and strike price, but with a future expiration date.  The
premise in a calendar spread is simple: time erodes the value of
the near-term option at a faster rate than the far-term option.
The positions in this section are speculative (out-of-the-money)
spreads with low initial cost and large potential profit.

*****
XMSR - XM Satellite Radio  $26.80  *** Cheap Speculation! ***

XM Satellite Radio (NASDAQ:XMSR) is America's #1 satellite radio
service.  With nearly 930,000 subscribers, XM is on pace for 1.2
million subscribers later this year.  Broadcasting live daily from
studios in Washington, DC, New York City and Nashville, Tennessee
at the Country Music Hall of Fame, XM provides its loyal listeners
with 101 digital channels of choice: 70 music channels, more than
35 of them commercial-free, from hip hop to opera, classical to
country, bluegrass to blues; and 31 channels of premiere sports,
talk, comedy, kid's and entertainment programming.  Compact and
stylish XM satellite radio receivers for the home, the car, the
computer and even a "boom-box" for on the go are available from
retailers nationwide.  In addition, XM is available in more than
80 different 2004 car models.

XMSR - XM Satellite Radio  $26.80

PLAY (very speculative - bullish/calendar spread):

BUY  CALL  FEB-30.00  QSY-BF  OI=3377   ASK=$1.15
SELL CALL  JAN-30.00  QSY-AF  OI=24203  BID=$0.35
INITIAL NET DEBIT TARGET=$0.70-$0.75
INITIAL TARGET PROFIT=$0.30-$0.55


***********************
STRADDLES AND STRANGLES
***********************

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.

*****
MATK - Martek Biosciences  $65.74  *** Probability Play ***

Martek Biosciences (NASDAQ:MATK) develops and sells products
made from microalgae.  Microalgae are microplants.  The firm
is engaged in the commercial development of microalgae into a
portfolio of high value products and new product candidates
consisting of Nutritional Products, Advanced Detection Systems
and Other Products, primarily Algal Genomics.  Their nutritional
products include nutritional oils for infant formula, dietary
supplementation and other products. Advanced Detection Systems
products include fluorescent dyes from various algae for use
in scientific applications for detection of certain biological
processes.
    
MATK - Martek Biosciences  $65.74

PLAY (speculative - neutral/debit straddle):

BUY CALL  MAR-65.00  KQT-CM  OI=957  ASK=$5.20
BUY PUT   MAR-65.00  KQT-OM  OI=6    ASK=$4.40
INITIAL NET-DEBIT TARGET=9.25-$9.50
INITIAL TARGET PROFIT=$3.45-$5.25

- or -

PLAY (very speculative - neutral/debit strangle):

BUY CALL  MAR-70.00  KQT-CN  OI=1604  ASK=$3.10
BUY PUT   MAR-60.00  KQT-OL  OI=219   ASK=$2.50
INITIAL NET-DEBIT TARGET=$5.30-$5.40
INITIAL TARGET PROFIT=$1.85-$2.95


*****


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

Anyone's Game
by - Nich Sheldon

Today's closing bell saw 14 indexes in the red and 13 in the 
green.  If this were any indication of where the markets are 
headed for 2004, then we would surmise that it's anyone's game.

The INDU Dow Jones Industrial Average, SPX S&P 500 Index, OEX S&P 
100 Index, and the NDX Nasdaq-100 Index all dipped on the first 
day of trading for 2004.  However, none of these big dogs lost 
more than half of a percentage point.  The TRAN Dow Jones 
Transportation Index gained 0.03 percent by market close.

The DDX Disk Drive Index drove higher on Friday, gaining +2.58 
percent.  Today's close was just beneath the 50-DMA, which has 
acted as strong resistance for over a month and a half.  A break 
of this mark and we could see a retest of 140.  If the DDX fails 
to climb over the 50-DMA we could see a dip back to 120.

The second largest gains were produced by the NWX Networking 
Index, which tacked on 2.32 percent.  Also noteworthy is the fact 
that the NWZ set a new 52-high on today's bullish activity.  

The GSTI Hardware Index gained +1.54 percent and broke out of its 
recent 5-point consolidation pattern.  The index remains in short-
term over bought territory, and its stochastics suggest potential 
profit taking over the next few sessions.

The only other index to gain more than 1 percent on the day was 
the INX CBOE Internet Index.  The INX added +1.25 percent but 
continues to struggle with resistance near the 170 level.  

Leading the decliners was The DJUSHB DJ US Home Construction 
Index, which faltered -3.29 percent.  The 50-DMA acted as support 
today, helping the Home Construction Index from falling even lower 
than its nearly 20-point decline.

The RLX S&P Retail Index fell through its 10 & 50-DMA's today, as 
it dropped -2.08 percent.  The RLX found support at the 20-DMA and 
today's decline helped bring the index back to neutral territory 
on the stochastics indicator.

The BIX S&P Banks Index was the last index to fall more than one 
percent with a drop of  -1.20 percent.  The 4+ point drop knocked 
the index back down to it's 10-DMA and into neutral territory.  
Most of the BIX index technical oscillators are suggesting further 
consolidation.


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

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