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Daily Newsletter, Tuesday, 01/06/2004

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The Option Investor Newsletter                 Tuesday 01-06-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: New Highs Once Again
Futures Markets: New Dollar Lows
Index Trader Wrap: I left my ego and my conscience at the door
Market Sentiment: Patiently Waiting


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-06-2004           High     Low     Volume Advance/Decline
DJIA    10538.66 -  5.41 10549.18 10499.85 1.95 bln   1688/1561
NASDAQ   2057.37 + 10.00  2061.54  2039.63 2.27 bln   1853/1406
S&P 100   557.75 +  0.44   558.11   555.53   Totals   3541/2967
S&P 500  1123.67 +  1.45  1124.46  1118.44
W5000   10925.16 + 18.80 10936.66 10876.18
RUS 2000  569.89 +  0.97   572.67   568.06
DJ TRANS 3037.26 +  8.60  3042.65  3012.66
VIX        16.73 +  0.76    17.67    16.19
VXO (VIX-O)15.34 -  1.37    16.78    15.07
VXN        22.76 -  1.13    24.21    22.69
Total Volume 4,473M
Total UpVol  2,567M
Total DnVol  1,837M
52wk Highs 1017
52wk Lows    13
TRIN       1.04
NAZTRIN    0.74
PUT/CALL   0.57
************************************************************

New Highs Once Again

Bad news from Gateway failed to deter tech buyers and the
Nasdaq rose to a new two-year high at 2061. It was just
yesterday that semiconductor billings came in at the lowest
level in three months. However, historical patterns of
investors buying tech stocks to open the year appears to
be over powering any negative tech news.

Dow Chart - Daily


Nasdaq Chart - Daily




Tech news was not the only bad news dragging on the markets.
The Weekly Chain Store Sales came in at -0.1% compared to
last weeks +2.0%. Holidays are over and it appears shoppers
are staying home. Colder weather in many states could have
also prompted shoppers to watch football from the couch
instead of blocking and tackling the malls. Good news was
a projection that December could have been stronger than
previously reported. Inventory levels are reported to be
very low indicating that there was a last minute push and
stores managed their inventory very well. However, low
inventory levels will prevent strong sales in January.
Considering most of those January sales are heavily
discounted not having any inventory may not be a bad thing.
I personally went to Target last weekend for some late
holiday shopping and on a list of 20 items the individual
had registered for at least 15 were sold out. Shelves were
bare in places and in others they had spread out merchandise
to 3-4 times the shelf space normally used in order to cover
up the holes.

Worse news for investors was the ISM Services Index. The
headline number came in at 58.6, well below the 60.3 estimate
and the lowest level in seven months. A 58 level still reflects
an expanding services sector but at the lowest level since
May it does not inspire confidence. New orders rose only
slightly and employment fell slightly. Basically it was
only a minor negative but with the strong market gains
pricing in strong growth this was another hairline crack
in the foundation. It was more of a talking point than a
real worry but on a slow news day it was the sound bite
we heard the most. The ISM services is normally a leading
indicator for manufacturing. A drop in services could
suggest a drop ahead in manufacturing. Far to soon to
tell and could also just be a holiday blip.

The Challenger Report showed that announced layoffs fell
slightly in December by -6.5% to 93,020 workers. Typically
companies make job cuts at year end to clean house before
the new year begins. The 93K number would indicate that
maybe the job cut cycle is fading and those normal job
cuts were light. To put it in perspective the number for
Dec-02 was also in the 93K level and it spiked significantly
in Jan/Feb to 135K again. There were several analysts
expecting a lower jobs number on Friday after the ISM and
Challenger numbers. While we may have a lower than expected
number I do not think you can make that link based on the
figures released today. Employment components for other
economic reports have been stronger and the timing of these
reports and the Jobs survey is different. The bigger impact
to the jobs number is the continued outsourcing of jobs
overseas.

Another weak number today was the Factory Orders which
dropped -1.4% but this was a November number and is already
priced into the market. Back orders did rise and inventories
continued to fall. Eventually we are going to get to the
point where we will have to trigger an inventory rebuild
cycle or there will be an impact to earnings from nothing
left to sell.

Gateway led the list of earnings warnings this morning with
an announcement that it could lose up to -15 cents after a
very tough 4Q. They said they were hurt by aggressive price
cutting by HPQ and Dell despite good sales in HDTV and
digital cameras. Downgrades were the order of the day with
both Dell and HPQ heading deeper into the consumer electronics
business Gateway's competition is only going to increase.
According to some analysts the 4Q was the best PC quarter
since 2000 in terms of sales but margins could be the worst
due to the price competition. PC models were heavily
discounted by both manufacturers and retailers in order to
move product and avoid left over inventory.

Planar Systems warned last night that slowing sales of flat
panel displays in its medical segment would lower its earnings.
They said the consumer business was good and would offset some
of the decline in the other segment but earnings would drop
to 20-22 cents when analysts were for 28 cents. PLNR fell
-18% in trading today.

GTW and PLNR were joined by LLY, TWTR, HLWD, DAB and JDAS who
also warned on Q4. Warning to the upside were CRDN on the
strength of defense orders and SBUX on stronger than expected
same store sales. GTRC also raised guidance on stronger than
expected sales. TMRS was down on allegations they had tried
to bury negative news on experimental drug T-1249. JDAS
said they failed to close a number of deals previously
expected. AMAT was upgraded by SG Cowen. Visteon was cut by
Goldman. ANF was downgraded by Lehman. The HMO sector was
downgraded by Goldman on worries that reimbursement payments
would be lowered.

The markets rallied to new highs but struggled in the process.
The volume was much stronger with total shares nearly 4.5B.
Internals were good but not great and advancers barely beat
decliners across all markets. The Dow hit 10549, only 50
points away from really strong resistance. (Not that any
resistance has mattered lately.) It took all day to recover
from the opening dip and ISM depression before it hit positive
territory and the new high. It was positive only briefly and
closed down slightly at -5 points. 10500 was support most of
the day and should be the critical level to watch the rest
of the week.

The Nasdaq was the hero with a +10 point gain to a 24-month
closing high despite the bad tech news. The Nasdaq has been
nearly vertical since hitting 1900 on Dec-10th. It is moving
into a very strong resistance range between 2065-2100 and
will find any further gains much tougher without any major
news event.

At the risk of sounding repetitious we are very overbought.
We have followed the January pattern exactly and set new
highs for the first three days of the year on the strength
of the year end retirement cash flow. The market rose despite
terror threats, earnings warnings and massive prior gains.
Very impressive. However, and you knew there had to be a
however, we are reaching very strong resistance levels and
today was the last day of any material retirement cash
inflows.

Dow Daily Chart with ADX




The Dow has gone from extreme to ridiculous. Using almost any
indicator you like the overbought conditions are very evident.
Using the ADX for example the current extremes on the Dow have
not been seen since December 1996. Not even during the bubble
years did the Dow reach these overbought levels. Considering
the Dow has gained +950 points since the end of November
without any material profit taking and the answer should be
clear. The last time the Wilshire 5000 was this extreme was
back in June of this year. Note the result.

Wilshire 5000 Chart with ADX




Those watching the market internals today saw a good example
of distribution in progress. Volume was strong but advancers
were only slightly better than decliners. The markets set new
highs but only barely with minimal gains. A lot of stock was
traded with little movement. To be fair this was the day after
a very strong gain. Just closing flat is an accomplishment but
it just did not feel that positive. With the normal January
high set in the first five days of the month we are right
there. This could have been the day.

We could also see one more climax high tomorrow at the open.
My target for the January high was 11000 on the Wilshire and
we closed at 10925 today. Very close considering the magnitude
of the numbers. I hate to be Chicken Little but trees do not
grow to the sky without losing a few leaves once in awhile.
We need to take some profits off the table soon or the
eventual correction will be much worse.

On Wednesday there are no material economic reports with only
Mortgage Applications and the Consumer Comfort Index. The only
speech to watch is Secretary Snow and the bond groupies will
be watching for comments on the dollar. The dollar set a new
low against the Euro on Tuesday and the bond guys expect the
strong dollar talk to pickup soon. We also have a lot of bond
paper coming to market this month and that will take some cash
out of the equity market in an election year.

The biggest report for the week is the Jobs report on Friday
and everything we see on Wednesday and Thursday will be
posturing in advance of those numbers. The consensus estimate
is for the addition of +127,000 jobs. Considering the November
number dropped to only +57,000 jobs this could be optimistic.
October had +137,000 and shocked the markets for a week.
Considering December is not normally a hiring month it will
be interesting to see if the estimates come to pass. A
negative number would be very serious.

Traders are keeping one eye on the five-day barometer for
guidance to the rest of the year. Historically if the first
five days of the year finish with a gain we have an 85%
chance of a positive year. If the first five days finish
with a loss there is a 50:50 chance the year will also close
down. Obviously you can twist the numbers any way you want
but traders are a superstitious lot and they really want to
keep it green through Thursday. For me I will be watching for
weakness between now and Friday. I would be very surprised if
we do not trade lower before the week is out. I consider it
a buying opportunity for those who have the patience to wait.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

New Dollar Lows
Jonathan Levinson

The US Dollar Index broke to new multiyear lows, driving gold,
silver, foreign currencies and the CRB to new multiyear highs.
Treasuries advanced, ES and NQ made new 52 week highs, and YM
traded in negative territory for most of the session, recovering
the bulk of its losses in the late afternoon.  Volatility crashed
lower, with the VXO finishing lower by 8.2% at 15.34, and the VXN
and QQV printing record lows, closing at 20.75 and 22.74
respectively.

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


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


10 minute chart of the US Dollar Index


The US Dollar Index sped to new lows below 85.40, recovering in
the morning in a pennant formation in the 85.60 area.    The move
coincided with a strong bounce in treasuries today, hesitant
bounces in equities that strengthened toward the end of the
afternoon, and strong moves higher in gold, silver and the CRB.
News of foreign central bank intervention in favor of the dollar
was widely circulated, yet the charts showed none of the large,
divergent rockets that generally accompany central bank prop
jobs.


Daily chart of February gold


February gold hit a high of 431 at the dollar lows, March silver
6.435 before reversing lower.  Gold spent most of the remainder
of the session around 424, finishing down 1 at 423.40 with a low
at 421.70.  HUI and XAU both reversed lower as well, confirming
the weakness.  The daily chart of gold gave its first sell signal
on the doji print, with the failure at a higher high leaving
ominous implications for gold bulls.  The apex of the failed bear
wedge is at 420, and that looks like critical support to me, with
next price confluence at 413.

HUI and XAU finished lower by 2.11% and 1.93% respectively, and
just as I urge caution for equity bulls, goldbugs need to be
careful here as well.  These are strong bull runs, but also very
extended markets.


Daily chart of the ten year note yield


The Fed drained another 9B in liquidity today, bringing the 2-day
total to a whopping 19B in intervention money drained.  Despite
this very substantial open market activity, ten year treasuries
rocketed north today, with the ten year yield dropping 11 basis
points to close at 4.277%.  I find this divergence frankly
baffling, with the dollar falling, the Fed draining, equities and
treasuries advancing.  I can only ascribe the bids in US assets
today to either short covering, central bank intervention (Hong
Kong Monetary Authority and ECB, according to the Reuters story I
read), or both.  Given how weak the bounce in the US Dollar Index
was, I'm leaning toward short covering in bonds and equities, but
it remains puzzling.  19B in repo money was returned to the Fed
in two days as bonds caught a bid and equities set consecutive 52
week highs.

The daily cycle upphase in the yield is still intact but
hesitated today on the strong drop.  Trendline support has held,
but any further weakness tomorrow will imply a retest of
Bollinger support in the 4.1% area.


Daily NQ candles


The NQ overcame a 30 minute cycle downphase, adding 8.50  to
yesterday's gains as the daily cycle upphase squeezed higher into
overbought territory.  Price is walking up the upper rising
Bollinger band as resistance weakens.  The daily cycle
oscillators are toppy but still upphasing, and today was yet
another example of the perils of top-picking in a rising market.
The volatility indices for the Nasdaq and QQQ both collapsed to
new record lows, upping the ante for bulls.  Extreme-low
volatility environments do not tend to persist for long (although
this rally is doing its best to alter that rule), and tend
overwhelmingly to resolve themselves to the downside.  But, until
a decline commences, the onus remains squarely on the shoulders
of bears.


30 minute 20 day chart of the NQ


The 30 minute cycle downphase got no price traction whatsoever,
lulling and tempting bears into what turned into a trap in the
late afternoon.  The overall gain was less than 10 points, and it
produced new record lows on the volatility indices, generating
new year highs on the index.  The move looks risking for bulls,
because the oscillators on the daily and 30 minute charts remain
toppy, and the current lower oscillator high against a higher
price high is ripe for a bearish divergence on any weakness in
price tonight or tomorrow morning.  But as today showed, it
remains a highly risky environment for bears:  price continues to
rise.  Resistance is at the day high of 1508, support at 1499,
followed by 1494.


Daily ES candles


The ES advanced slightly, but did so leaving a bullish doji
hammer off the lows, hugging the upper rising trendline at 1120.
The uptrend weakened slightly on a daily basis, but considering
that such occurred with the 30 minute cycle in a downphase for
most of the session, it was an impressive feat.  The ES moved a
small step closer to a sell signal on the daily cycle
oscillators, but that signal has not yet issued.  1110 is set up
as first support, with resistance at 1127 as implied by the upper
rising Bollinger band.


20 day 30 minute chart of the ES


The 30 minute downphase ended early, following a mostly non-
configuration looks like it's begging for a sharp selloff, with
the 300 minute stochastic rising uncertainly at a lower higher
against the new year highs on the ES.  Any weakness at tomorrow's
open would imply a strong drop, but if it we get strength
instead, look for 1127 as a preliminary target.  1116 is
preliminary support, followed by 1110 and 1096.  If the open is
weak, we should see 1116 challenged and if 1110 fails, it will
appear likely that the anticipated rollover in the daily cycle
oscillator is finally commencing.


150-tick ES


The session ended with the short cycle oscillators trying to
rollover, but a wavelet trough (lower panel 10-3-5 stochastic)
was supporting the price early in the afterhour session.


Daily YM candles


The YM was the weakest of the equities, closing a 4 points in the
red.  It is showing signs of a weakening in the uptrend, but it
remains dangerous for bears until a daily cycle downphase has
begun.  This had not occurred as of this writing, but another
failure to break and hold 10530 makes it more likely.  Above that
level, however, next channel resistance lines up with Bollinger
resistance at 10600.

20 day 30 minute chart of the YM


Nothing to add on the 30 minute YM.

Today was a boring session, with the bulk of the moves occurring
at the cash open and toward the cash close.  Market participants
continue to ignore the damage occurring in the dollar, as
commodities continue to rally.  I have stressed the
incompatibility of rallies in oil and equities, but it will not
matter until it does- in the meantime, it's far safer to trade
the individual charts while keeping an eye on the intermarket
relationships.  The strength in bonds and the weakness through
most of the session in equities against weakness in the dollar
was a reversal of the trend we've been seeing for the past weeks,
and could be telegraphing a change on its way.  I'm personally
more than ready for a trend change, as are the indicators I
follow.  See you tomorrow morning.


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

I left my ego and my conscience at the door

Several years ago I learned a hard lesson about egos and guilt.
Right now I sense both of these emotions are at play.  Bears
want to prove they can pick a top (ego), which may indeed also
be backed up by a firm belief, or conviction.  At the same time,
bulls feel guilty they might be the one trader in the market to
buy the top, or worse, not sell it!

If you don't think it wasn't hard for me to close out a bullish
trade in the NASDAQ-100 Tracker (AMEX:QQQ) $37.34 +0.67% at a
prior outlined bullish target of $37.25 (which was raised from
$37.00), and then trade long again at $37.41, a session high,
your wrong.  However, there was no guilt associated with the
trade, and there was no ego involved as if to try and prove a
point.

There were a couple of things I saw today, that simply shouldn't
have happened, and when they did, I thought it best to get back
on the bullish bandwagon, and see where this seemingly smoothly
paved highway is destined.

Tonight's wrap is going to be centered on the topic of trying
to avoid any type of TECHNICAL difficulty, if at all possible,
with further attempt to travel along a path of least resistance.

Right now, the path of least resistance, as I see it, is with the
NASDAQ-100 (NDX.X) 1,501.26 +0.31% and its Tracking Stock
(AMEX:QQQ) $37.34 +0.67%.

Here's today's hourly breakdown of the major indices and market
internals.

Market Snapshot / Internals - 01/06/04 Close



There's nothing overly important I could point out from today's
market internals, other than some of the stretching from the A/D
lines (advancers building, decliners building) from approximately
10:00 to 12:00, had the A/D line snapping back toward the bullish
side by 01:00 PM EST.  You're correct!  NASDAQ's A/D started to
snap back at the 12:00 hour, almost as if trying to take over a
leadership role from the NYSE.  This is different than what we've
been used to seeing isn't it?  Today is just one day, but
something I pick up on.  I'm also noting a more important
development, and that is the NASDAQ NH/NL breadth has today's 355
number of new highs at the NASDAQ, the highest number since
December 2nd's 411 new highs.

Certainly, this is something I (Jeff Bailey) would want to be
monitoring, if I'm sticking my neck by profiling bullish trades
in the NASDAQ-100 Tracking Stock (AMEX:QQQ).

To be perfectly honest, I did not in my wildest evening dreams
see the QQQ trading its MONTHLY R1 of $37.36 in today's session.
While it was nice to book a profit in the QQQ at $37.25, I
thought bulls should get back on board the QQQ in today's trade.
Here's what I found in the futures market, using my technique of
fitted retracement, which I try to tie in with the NDX/QQQ.

NASDAQ e-mini March futures (nq04h) - Daily Intervals



The e-mini NASDAQ futures trade in increments of 0.25, and I was
certain that our QQQ bullish exit point was almost "perfection"
at $37.25.  With that trade closed out, it allowed some time to
do some technical analysis, on the futures chart.  With the
market internals trying to recover and big short interest in the
various trackers, there might have been more upside.

I posted the above chart, in today's futures monitor, right when
the "bear's den" as I affectionately call the futures monitor,
became more active.  At the time, the nq04h was still in its
"zone."  I show this only to let us know, there is plenty of
bearish sentiment out there.  Hey... you don't get record amounts
of short interest in the SPY and QQQ without some bearish
sentiment!  The names of the bears have been changed to protect
the trader.  I have no problem showing my name when looking at
trades.

Futures Monitor Commentary - 01/06/04



Reading from the bottom up, you can now see what eventually
happened as new highs were found.  Now, I haven't read all of
today's future monitor, but Trader #1 looks to still have his/her
trade open, as the futures contract high looks to have been
1,505.50.  I should also say that the chart shown above is a
chart I (Jeff Bailey) am using, to simply try and establish a
bias (green arrows are bullish, pink arrows alert to weakness).
Once I see a lower high and lower low, then I would use a red
arrow as being alert to more BEARISH technicals.

The reason I show the above is not really to critique trading,
but to simply try and display what I "sense" to be taking place
right now, especially in the QQQ.  Each new high at this point
just builds uncertainty among bears.  "I know it is overbought,
extended, overvalue, manipulated... but I'm not sure where
resistance is and I'd better stop out and keep losses small."
And right now... this just seems to be feeding on itself in a
very bullish upward trend.

OK... now I think the above chart of the NASDAQ futures looks
like a chart with little resistance right now, where sellers
might be found.

Let's take a quick look at the Pivot Analysis Matrix.

Pivot Analysis Matrix



First things first.  If you traded the S&P futures yesterday,
today's lows in the SPY and SPX, or those numbers seem strikingly
familiar to you.  In the es04h, 1,112 was a firm level of support
yesterday afternoon that found buyer, and when 1,118 was taken
out to the upside, which looked to me like a neckline of an
intra-day reverse head/shoulder pattern, well.... the es04h
didn't look back, and today's lows in the SPX of 1,118.44 smells
of suspicious support.

The S&P Banks Index (BIX.X) has just been trading sideways in
recent sessions, and this could be a key sector to monitor
tomorrow.  For the most part, index bulls (INDU/SPX/OEX) most
likely want to see some upside, or correlative support around the
337 level.

The biggest resistance I see is in the OEX, which gathers around
the 560 level.  I put this chart together late last night, and
simply forgot to place it in this morning's 09:00 AM EST Update.

S&P 100 Index (OEX.X) Chart - Weekly Intervals



I wanted to show a weekly interval chart, just so I could show
where I've attacked retracement from, in conventional manner, and
tie in the current MONTHLY R1 and WEEKLY R2, along with the
conventional 80.9% retracement level, where market participants
may be waiting to see what takes place at the 560 level.  I (Jeff
Bailey) do not view this as BEARISH as trend is so bullish, but
does present some resistance.

OK, so I thought I'd try and find some "trouble" to convince me
not to establish a new bullish position in the OEX at this point.
The OEX is a market-cap weighted index right?  Right.  What's the
largest market cap stock in the OEX right now?  General Electric
(NYSE:GE) $31.37 -0.66%.

General Electric (GE) - Weekly Intervals



I thought I show a WEEKLY interval chart of GE, which right now
is the largest market cap stock in the OEX.  Bears that are
technically oriented will view this chart as a good risk/reward
short, based on the pattern recognition of a POTENTIAL
head/shoulder top.  Bears will most likely stop out on a move
above $32.00, which I (Jeff Bailey) might associate with OEX 560-
562.

GE is also a component of the Dow Industrials (INDU).

Dow Industrials (INDU) Chart - Daily Intervals



Bump... Bump... The INDU has bumped against the upper-end of our
bullish regression channel again today.  This is NOT a BEARISH
chart in my opinion, but the INDU is finding some resistance
where we might expect it too.  Hey... BIG MONSTER MOVE HIGHER,
but taking a rest right now.  INDU is very important to market
psychology, but as a bearish trader proclaimed today... "it just
won't break below 10,500!"  See... psychological.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals



No General Electric (GE) in the NDX/QQQ, no banks, and while
there may be some resistance I'm not aware of, other than the
MONTHLY R1 f $37.36 (I tried to set my bullish trigger at $37.41
so it wouldn't get traded) the QQQ looks to be the index where
there is less resistance right now.

The kicker may be prior notes that January is rather bullish for
the NASDAQ, where the Stock Trader's Almanac noted that over the
past 32-years, the NASDAQ has gained 4.1% in the month of
January.  The INDU +2.2% and SPX +2.1%.

Jeff Bailey


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

Patiently Waiting
- J. Brown

The markets appear to be patiently waiting for the Q4 earnings
season to start and disappointing economic data is not going to
get in its way of just waiting.  At least that's what it seems
like today.  The ISM services index was a disappointing 58.6 in
December, down from the 60.1 in November and the estimates for a
small gain to 60.8.  Plus, the factory orders in November fell
but then they were expected to.  No, the real story today was
probably not the economic data but the lack of selling in the
major indices.  Investors seem willing to hold on until we begin
to hear just how good the last quarter really was.

The DJIA held on to its Monday gains while the NASDAQ, so close
to a two-year high yesterday, decided to make it official.  The
NASDAQ gains were driven by strength in the tech sector (as
usual) and one might be lead to believe that the path of least
resistance remains up.  However, we should not forget that the
first few days of January are traditionally bullish ones so the
recent strength comes as no surprise to anyone.

Tomorrow is free of economic news and Thursday has a few reports
including the December same-store sales figures for this
country's retailers.  Plus Alcoa opens the earnings season with
its own report on Thursday after the close.  Yet the big event
everyone is now looking to is Friday's December jobs report.
Economists are hoping for an improvement of 148,000 jobs.


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

Market Averages

DJIA ($INDU)

52-week High: 10549
52-week Low :  7416
Current     : 10538

Moving Averages:
(Simple)

 10-dma: 10413
 50-dma:  9960
200-dma:  9271



S&P 500 ($SPX)

52-week High: 1124
52-week Low :  788
Current     : 1123

Moving Averages:
(Simple)

 10-dma: 1106
 50-dma: 1066
200-dma:  996



Nasdaq-100 ($NDX)

52-week High: 1504
52-week Low :  795
Current     : 1501

Moving Averages:
(Simple)

 10-dma: 1463
 50-dma: 1422
200-dma: 1281



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

A number of traders have been worried that something is just
going to yank the carpet out from underneath this market.  It's a
common fear these days.  Yet it looks like the only carpet
yanking around here has been in the volatility indices.  The VXO
(old VIX) has plummeted from its recent relative high back
towards its multi-year lows.  The VIX has followed suit and the
VXN has hit new all-time lows as of today.

CBOE Market Volatility Index (VIX) =  16.73 -0.76
CBOE Mkt Volatility old VIX  (VXO) =  15.34 -1.37
Nasdaq Volatility Index (VXN)      =  22.76 -1.13


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.57      1,003,430       567,995
Equity Only    0.40        872,664       347,760
OEX            1.11         23,950        26,677
QQQ            0.46         76,443        35,408


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.2    + 1     Bull Confirmed
NASDAQ-100    79.0    + 6     Bull Confirmed
Dow Indust.   86.6    + 0     Bull Confirmed
S&P 500       85.6    + 2     Bull Confirmed
S&P 100       84.0    + 0     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: 0.91
10-dma: 0.89
21-dma: 0.99
55-dma: 1.06


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    1433      1726
Decliners    1425      1371

New Highs     495       351
New Lows       14         6

Up Volume    967M     1408M
Down Vol.    885M      822M

Total Vol.  1888M     2248M
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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The Option Investor Newsletter                  Tuesday 01-06-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: NSM
Call Play Updates: DGX, GD, GILD, YHOO
New Calls Plays: DLX, MXIM, UTSI
Put Play Updates: BBY, WHR
New Put Plays: None


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

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


CALLS:
*****

None


PUTS:
*****

National Semi. - NSM - close: 40.76 change: +0.70 stop: 40.50

Our NSM play strung us along again over the weekend, giving just
enough negative price action to have us thinking the downside
break would come this week.  The break came, but it was to the
upside.  NSM pushed back up near the $40 level yesterday on the
back of lots of bullish action in the Semiconductor sector, but
with the close near that key resistance level, it still looked
like it could roll over today.  Such wasn't the case though, with
the stock breaking through that resistance that had held for the
past couple weeks and then moving through our $40.50 stop.  Price
stalled at the 50-dma ($40.84), but with oscillators now pointing
up, more upward movement seems in order.  Any open positions
should have been stopped out today, but for those that may be
still holding on, a pullback into the $39-40 area should be used
for exit.

Picked on December 9th at     $38.70
Change since picked:           +2.06
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      3.42 mln



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option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
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********************
PLAY UPDATES - CALLS
********************

Quest Diagnostic - DGX - close: 73.01 chg: +0.51 stop: 69.00

News continues to be sparse for DGX but shares did produce a
bounce near the $72 level on Monday. We were expecting a deeper
move towards the 70-71 area but investors appear to have bought
the dip and DGX looks ready for a move towards its next hurdle at
the $75 mark.  Remember, we're playing DGX's wide rising channel.
Hopefully the trend will continue and shares will reach the $80
level in a couple of weeks.

Picked on December 30 at $72.95
Change since picked:     + 0.06
Earnings Date          01/22/03 (unconfirmed)
Average Daily Volume:      836  thousand
Chart =


---

General Dynamics - GD - close: 89.10 chg: -0.29 stop: 84.99

The quiet continues for shares of GD as well.  There is nothing
new to report.  No headlines, no big price moves.  The DFI defense
index has pulled back to the bottom of its narrow, rising channel
(and 10-dma).  We could witness a more significant pull back soon.
On Sunday we mentioned that we're expecting GD to pull back to the
86-87 levels.  Well, we're still waiting.  The daily MACD
indicators is in the process of producing a sell signal while its
RSI and stochastics already point lower.  Be patient if you're
still looking for an entry point.

Picked on December 21 at $88.78
Change since picked:     + 0.32
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million
Chart =


---

Gilead Sciences - GILD - close: 57.94 change: -0.22 stop: 56.00

Like Chinese water torture, our GILD play continues in its dull
trading pattern.  Each day sees a feeble attempt at a rally
before the stock rolls over and closes at a new low.  That
pattern was repeated today, with a failed bounce near the 10-dma
and then a close near the bottom of the contracted range.  GILD
continues to be confined within its neutral wedge, but with the
lines describing that wedge now only $2 apart, something will
have to give soon.  We're still leaning towards a breakout and
initial rally to the $64 area at which point we can evaluate the
stock's strength and potential to rally to the top of the gap at
$66.  While aggressive traders can consider a rebound off the
lower trendline ($57.70) as a viable entry, the better approach
would seem to be to wait for a breakout over $60.50 before
playing.  We've been patient for over 2 weeks, waiting for the
play to setup, but if GILD can't get moving by the weekend, then
we'll let it go for lack of interest.  Since we're playing the
wedge formation, it should be safe to raise our stop to $57.

Picked on December 21st at   $59.40
Change since picked:          -1.46
Earnings Date               1/29/04 (unconfirmed)
Average Daily Volume =     3.74 mln


---

Yahoo! - YHOO - close: 47.24 change: +0.34 stop: 43.75 *new*

We mentioned that Monday might bring some news as YHOO's
management spoke at the Smith Barney conference in Arizona today.
Sure enough, Yahoo's CEO Terry Semel delivered.  When asked about
YHOO's 2004 priorities Semel responded that that their short-term
goal was world domination - so to speak.  He wants to have the
entire world using Yahoo's new search that they have yet to
launch.  That means the company will be dropping Google's search
technology that they currently license and implementing their
own.  It's time to start seeing some return on investment for
their $2 billion in acquisitions last year with Inktomi, a search
engine company and Overture, a paid search advertising player.
The switch could come some time in the first quarter but YHOO
isn't just changing its search technology but plan to make it
more customizable for the user and harder for their rivals to
duplicate.  These comments from YHOO plus new reports suggesting
that the online holiday sales season grew 30%, much stronger than
expected, have sent shares of YHOO higher.  If we see a dip to
$46 it might be an entry point but it looks like smooth sailing
toward the $50 level.  The recent strength has also produced a
quadruple top breakout on its P&F chart that could draw new
buyers. We're going to raise our stop loss to $43.75.

Picked on December 24 at $45.01
Change since picked:     + 2.23
Earnings Date          01/14/03 (unconfirmed)
Average Daily Volume:      12.3 million
Chart =



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

Deluxe Corp. - DLX - close: 42.30 change: +1.11 stop: 40.50

Company Description:
Deluxe Corporation provides personal and business checks,
business forms, labels, personalized stamps, fraud prevention
services and customer retention programs to banks, credit unions,
financial services companies, consumers and small businesses.
The company reaches clients and customers through a number of
distribution channels, including the Internet, direct mail, the
telephone and a nationwide sales force.

Why we like it:
After topping out near $48 this summer, shares of DLX entered a
protracted downtrend that brought the stock all the way down to
the $38.50 level by late November.  After rebounding from that
low, the stock finally posted a higher low near $39.50 and
rebounded once again to leave in place the potential for a Head &
Shoulders bottom.  The bulls tried to capitalize on that
formation last week, pushing the stock just fractionally above
the $41.80 neckline, but couldn't hold altitude in the holiday-
lightened volume environment.  DLX pulled back slightly to find
support just below $41 and then charged ahead strongly today.
This push seems to have done the trick, with the stock gaining
nearly 2.7% and closing solidly above that neckline.  With this
confirmation of the H&S pattern, we can project a minimum upside
target of $45.10.

Another bullish factor from Tuesday's session was the way DLX
powered right through the 38% retracement ($42.18) of the decline
from the July highs.  With price currently right at potential
resistance (former support ($42.25-42.50) a near-term pullback is
likely.  A drop back to confirm support in the $41.50-41.75 area
should provide a solid entry point on the rebound.  Next
resistance will come in near the 200-dma ($42.80), so momentum
traders will want to wait for a break above there before playing.
Above the 200-dma, look for DLX to be challenged by resistance in
the $44 area before finally pushing towards our initial target at
$45.  Because of the strength of resistance at $45, we're
recommending harvesting gains at that point, rather than holding
on for a home-run move back to the area of the July highs.  We're
setting a fairly tight stop at $40.50, which is just below both
the 20-dma ($40.58) and 50-dma ($40.54), as well as the intraday
lows of the past couple weeks.

Suggested Options:
Shorter Term: The April 40 Call will offer short-term traders the
best return on an immediate move, as it is currently in the
money.  While we've listed the January $50 strike, with
expiration just over a week ago, that option should only be
considered by very aggressive traders.

Longer Term: While there are February strikes available, they
currently have no open interest.  Until some open interest
builds, longer-term traders should focus their attention on the
April strikes.  Our preferred option is the April $40 strike,
which is in the money and has plenty of time until expiration.

! Alert - January options expire in less than 2 weeks!

BUY CALL JAN-40 DLX-AH OI=312 at $2.65 SL=1.25
BUY CALL APR-40*DLX-DH OI=118 at $3.30 SL=1.75
BUY CALL APR-45 DLX-DI OI= 87 at $0.80 SL=0.40

Annotated Chart of DLX:



Picked on January 6th at     $42.30
Change since picked:          +0.00
Earnings Date                   N/A
Average Daily Volume =        338 K


---

Maxim Integrated - MXIM - close: 51.89 change: +1.61 stop: 49.50

Company Description:
Maxim Integrated Products is a leading international supplier of
quality analog and mixed-signal products for applications that
require real world signal processing. (source: company press
release)

Why We Like It:
This bullish play on MXIM is pretty simple.  Chip stocks are hot
again after several weeks of consolidation and recent news that
November global chip sales rose 26% for the fourth consecutive
month of gains is lending a lot of confidence that the trend will
continue in 2004.  Shares of MXIM have been consolidating in a
bull flag pattern and just broke out on Monday and we're seeing a
confirmation of that breakout with rising volume (and price)
today.

There is immediate resistance at $52.50 and potentially more at
the November high but it looks like MXIM is just following its
rising channel.  Thus, bullish traders can probably target $57.50
or more given time.  We're going to suggest new positions at
current levels but if we got the chance we'd prefer to buy a dip
toward the 51-50 region.  We'll initiate the play with a stop
loss at 49.50.

Suggested Options:
There are only two weeks left for January options so our
preference is the February or May strikes.  Our favorite is the
February 50's.

BUY CALL FEB 50 XIQ-BJ OI=2095 at $3.70 SL=1.85
BUY CALL FEB 55 XIQ-BK OI=1658 at $1.35 SL=0.65
BUY CALL MAY 55 XIQ-EK OI= 819 at $3.20 SL=1.65

Annotated Chart:



Picked on January 06 at $51.89
Change since picked:    + 0.00
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =


---

UTStarcom Inc - UTSI - close: 40.71 change: -0.12 stop: 37.85

Company Description:
UTStarcom is a global leader in IP access networking solutions
and international service and support. The company sells its
wireline, wireless, optical and switching solutions to operators
in both fast growth and established telecommunications markets
around the world. UTStarcom enables its customers to rapidly
deploy revenue-generating access services using their existing
infrastructure, while providing a migration path to cost-
efficient end-to-end IP networks. Founded in 1991 and
headquartered in Alameda, California, the company has research
and design operations in New Jersey, China, and India.
(source: company press release)

Why We Like It:
UTSI appears to be leading the wireless revolution in emerging
markets like China and Latin America.  Their PAS (personal access
system) systems are a low-cost option and UTSI has become the
worldwide leader in the PAS market.  Analysts seem to agree that
the opportunity for UTSI looks pretty promising through 2005 and
their current subscriber growth rates are very encouraging. The
recent breakout above resistance at $40.00 with twice the normal
volume looks like an entry point.  Traders had an opportunity to
take profits today but bulls stepped in to buy the dip when UTSI
approached $40 again.  We're going to set our initial target at
the $45 to $46 range.  We'd suggest a stop loss at $37.85.
Should the stock dip below $40.00 look for more support at the
$39.00 level.

Ah...and I almost forgot.  UTSI has a very tempting point-and-
figure chart.  After the weakness last year the stock found
support at its rising bullish P&F trendline.  The recent
consolidation and breakout has led to a fresh triple-top buy
signal, which looks pretty trade worthy.

Suggested Options:
There are only two weeks left for January options to we suggest
the February or May strikes.  Our favorite is the February 40's.

BUY CALL FEB 35 UON-BG OI=4634 at $6.60 SL=3.85
BUY CALL FEB 40 UON-BH OI=6624 at $3.30 SL=1.70
BUY CALL FEB 45 UON-BI OI=2920 at $1.30 SL=0.65
BUY CALL MAY 45 UON-EI OI=1042 at $3.20 SL=1.75

Annotated Chart:




Picked on January 06 at $40.71
Change since picked:    + 0.00
Earnings Date         01/26/03 (unconfirmed)
Average Daily Volume:      3.0 million
Chart =



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

Best Buy Company - BBY - close: 51.64 change: -0.09 stop: 53.50

Following last week's drop in the Retail index (RLX.X), we've
seen fresh money come into the group (along with the rest of the
market) this week.  The index has bounced back from the $370
level and is once again nearing resistance at $380.  Our BBY play
has bounced as well, but is performing more weakly than the
overall sector.  Monday's broad market rally lifted the stock to
the 20-dma ($51.74), but rather than following the RLX higher
today, the stock stalled below that average and actually posted a
fractional loss.  With strong resistance in the $52.00-52.50
area, entries on failed bounces below that zone look attractive,
especially with a tight stop at $53.50, just over the 100-dma
($53.39).  More conservative traders will want to see BBY break
back under $50.50 before playing.  Below $50, there will be some
support near $48.50-49.00 in the vicinity of the December lows,
but once below there, we can target a drop to the 200-dma
(currently $45.99).

Picked on January 4th at     $50.82
Change since picked:          +0.82
Earnings Date               3/17/04 (unconfirmed)
Average Daily Volume =     4.20 mln


---

Whirlpool Corporation - WHR - cls: 71.90 chng: -0.32 stop: 73.50

Picking on WHR as a surrogate for the weakness in the Housing
sector was definitely a prudent choice.  Not so much because the
stock has headed south, but because it didn't rally big like the
Housing stocks did on Tuesday, with many of them up more than 2%
on positive reception of the day's economic data.  While WHR did
bounce back on Monday following Friday's sharp selloff, it has
been interesting that there has really been no strength or
weakness to speak of.  WHR traded in roughly a $1 range today and
ended near the middle of that range, posting a clear doji
candlestick which is indicative of indecision.  Daily Stochastics
and MACD have now turned decidedly bearish and now we wait to see
if price action will follow suit.  The action so far this week
has provided a couple opportunities to enter on failed rebounds
below $72, and that still looks like a decent strategy.  Traders
more comfortable with entering on proven weakness will want to
wait for a break below $70.90 before playing.  Maintain stops at
$73.50, just over the October high.

Picked on January 4th at      $71.18
Change since picked:           +0.72
Earnings Date                2/05/04 (unconfirmed)
Average Daily Volume =         601 K



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

None


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

Please read our disclaimer at:
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**************************************************************
ADVERTISING INFORMATION

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Contact Support
The Option Investor Newsletter                  Tuesday 01-06-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - MXIM


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

Maxim Integrated - MXIM - close: 51.89 change: +1.61 stop: 49.50

Company Description:
Maxim Integrated Products is a leading international supplier of
quality analog and mixed-signal products for applications that
require real world signal processing. (source: company press
release)

Why We Like It:
This bullish play on MXIM is pretty simple.  Chip stocks are hot
again after several weeks of consolidation and recent news that
November global chip sales rose 26% for the fourth consecutive
month of gains is lending a lot of confidence that the trend will
continue in 2004.  Shares of MXIM have been consolidating in a
bull flag pattern and just broke out on Monday and we're seeing a
confirmation of that breakout with rising volume (and price)
today.

There is immediate resistance at $52.50 and potentially more at
the November high but it looks like MXIM is just following its
rising channel.  Thus, bullish traders can probably target $57.50
or more given time.  We're going to suggest new positions at
current levels but if we got the chance we'd prefer to buy a dip
toward the 51-50 region.  We'll initiate the play with a stop
loss at 49.50.

Suggested Options:
There are only two weeks left for January options so our
preference is the February or May strikes.  Our favorite is the
February 50's.

BUY CALL FEB 50 XIQ-BJ OI=2095 at $3.70 SL=1.85
BUY CALL FEB 55 XIQ-BK OI=1658 at $1.35 SL=0.65
BUY CALL MAY 55 XIQ-EK OI= 819 at $3.20 SL=1.65

Annotated Chart:



Picked on January 06 at $51.89
Change since picked:    + 0.00
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =



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