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Daily Newsletter, Wednesday, 01/07/2004

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The Option Investor Newsletter                Wednesday 01-07-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Techs Lead Again
Futures Wrap: Nasdaq Volatility Crash
Index Trader Wrap: Rotation!
Traders Corner: An Organized Approach to Trade Selection


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     01-07-2004            High     Low     Volume Advance/Decline
DJIA    10529.03 -  9.63 10539.46 10466.29 2.23 bln   1502/1359
NASDAQ   2077.68 + 20.31  2078.09  2047.02 2.27 bln   1819/1282
S&P 100   559.31 +  1.56   559.31   554.35   Totals   3321/2641
S&P 500  1126.33 +  2.66  1126.33  1116.45
RUS 2000  574.62 +  4.73   574.62   567.84
DJ TRANS 3034.06 -  3.20  3038.90  2999.97
VIX        15.50 -  1.23    16.75    15.50
VXO        14.85 -  0.49    16.14    14.75
VXN        21.91 -  0.85    23.01    21.81
Total Volume 4,903M
Total UpVol  2,859M
Total DnVol  1,958M
52wk Highs     812
52wk Lows       13
TRIN          0.86
PUT/CALL      0.69
*******************************************************************

Techs Lead Again
by James Brown

The Santa Claus rally has morphed effortlessly into a strong 
"January effect" and the trend from mid-December remains 
unbroken.  Charging to the forefront was the NASDAQ composite, 
which closed at 29-month highs (best since August 2001) on the 
backs of strong gains for the networking and disk drive sectors.  
Lending strength to the Dow and the NASDAQ 100 was component 
Intel, which jumped 3.3% on an upgrade.  Bonds rallied as well 
after comments from US Treasury Secretary John Snow rallied the 
dollar, if only for the day.  

Market internals were mostly bullish.  The NYSE saw 15 advancers 
for every 13 decliners.  On the NASDAQ there were 18 winners for 
every 13 losers.  Up volume outpaced down volume and overall 
volume remained relatively strong with more than 2 billion shares 
trading on each exchange.  Disk drives and networking stocks saw 
the heaviest buying today but airline stocks also turned in a 
good performance.  Out performers also included defense issues, 
biotech stocks and broker-dealers.  I did note that European 
bourses were mostly negative as was the NIKKEI but the Hang Seng 
posted another triple-digit gain.  Profit taking also slowed 
crude oil, which slipped 8 cents to $33.62 a barrel and February 
gold futures, which dropped 90 cents to $422.30 an ounce.

Chart of the DJIA:

 

Chart of the NASDAQ:

 

Intel was one of the market leaders today and shares added $1.09 
or 3.3 percent to close at $33.99.  The move was powered by 
positive comments from an analyst at Sanford Bernstein.  The firm 
upgraded the stock from "market perform" to "out perform" and 
raised their 2004 earnings estimates from $1.20 to $1.27 and its 
price target to $42.  They believe that seasonal price swings in 
chips will lead to a better than expected first half in 2004.  
Combine these comments with growing expectations for 
semiconductor sales to soar 17% to 20% in 2004 and it's easy to 
see why investors are moving money into the group.  On a side 
note, Intel announced this morning that it would be investing 
$200 million into a fund designed to "accelerate" digital home 
innovation.  

Another tech stock leader today and responsible for the strong 
gains in the NWX networking index is Nortel Networks (NT).  
Shares of NT soared 19 percent on volume of 138 million shares 
(average volume is just 17 million).  Driving the rally was an 
announcement that Verizon Communications (VZ) had chosen NT to 
equip them for VoIP (Voice over IP), the next big thing in 
telecom this year.  Dollar amounts were not disclosed but the 
huge move today is clear evidence that the markets are excited 
about VoIP and happy to see businesses spending money again.  The 
news prompted Merrill Lynch, Smith Barney and UBS to upgrade 
shares of NT.  

The markets were also encouraged by positive comments from 
personal products producer Procter & Gamble (PG) who announced 
that Q2 earnings (quarter ending Dec. 31st) would be above 
current analyst estimates by high as 4 cents a share.  The surge 
in profits is due to the early flu season and higher sales of 
cold remedies in their Vicks and NyQuil lines.  Current consensus 
is for net profit of $1.26 a share and PG will announce their 
results on January 28th.  

Disappointing investors today was software company JDA Software 
(JDAS) who warned that last quarter's earnings would miss.  
Estimates had been for $0.10/share and now the company expects to 
break-even or maybe hit $0.01/share due an inability to close 
some deals before the quarter ended.  The stock fell 16.5% to 
close just above its simple 200-dma.  Earnings are expected 
around January 20th.  

Meanwhile Circuit City, the No 2 consumer electronics retailer, 
announced more bad news with total December sales falling 1 
percent and same-store sales falling 2 percent.  The company 
continues to fall behind larger rival Best Buy despite a three-
year restructuring program to make them more competitive.  
Traders following the story can look for BBY to report on their 
own December sales tomorrow.  

Elsewhere in the business world today the financial media was 
abuzz with conjecture that Andrew Fastow, the former CFO for 
Enron Corp, and his wife Lea would cop a guilty plea.  
Prosecutors are hot after Jeff Skilling and Ken Lay and the rumor 
mill is suggesting that the Fastow's would plea bargain for 
lighter sentences in exchange for their testimony.  Plus, word 
was circulating on Wall Street that NY State Attorney General 
Elliot Spitzer would sue former NYSE head Dick Grasso for part of 
his outlandish $140 million pay package.  

Tomorrow investors will get to see just how strong the 2003 
holiday season was when retailers turn in their December same-
store sales figures in the morning.  Economists will also be 
looking for the weekly jobless claim numbers.  Last week's 
figures were lower than expected so current estimates are for a 
small rise to 345,000.  Thursday night will be the official 
launch of earnings season with Dow component Alcoa (AA) who is 
estimated to earn 34 cents, up from 16 cents last year.  

Meanwhile the real event this week has yet to occur with the 
December jobs report due out on Friday.  Economists are looking 
for a gain of 148,000 new jobs, up from 57,000 in November.  
Unemployment is expected to hold steady at 5.9 percent.  

Barring any huge surprises in the Friday jobs report don't be 
surprised to see the current trends remain intact.  Investors are 
holding on to their positions until earnings season hits full 
swing next week.  That's when we can worry about any "sell the 
news" reactions.


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

Nasdaq Volatility Crash 
Jonathan Levinson

The US Dollar Index rallied off the lows today, with comments John 
Snow and speculation about ECB intervention.  Treasuries added to 
yesterday's gains, gold and silver fell, and equities traded 
choppily as the short and 30 minute cycles battled it out, the 
Nasdaq and NDX volatility indices setting new record lows as the 
NQ and ES broke to new year highs in the last hour of trading.

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 stair-stepped its way higher, breaking back 
above the 86 level and holding it in a long-overdue bounce.  The 
strength and suddenness of sellside campaigns in the USD has been 
frightening and constant, but given how oversold the dollar had 
become, there's ample evidence to justify the move.  Euro futures 
were lower by as much as 10 bps, and the ECB is scheduled to make 
a rate announcement tomorrow.  Gold and silver pulled back to 
recent support, while treasuries advanced, despite a 5-year note 
auction and only a small net addition of 2.5B from the Fed via its 
open market operations.  The CRB was fractionally lower, holding 
the 26 level, with strength from cocoa, sugar and live cattle 
futures.


Daily chart of February gold


February gold held 420 support today, trading modestly lower for 
most of the session and finishing -2.40 at 421, with a session low 
of 420.40.  Jane Fox noted in the Futures Monitor that the Chicago 
Board of Trade (CBOT) today announced that a new daily volume 
record set yesterday for mini-sized Gold futures, 2,648 contracts 
traded, breaking the previous record of 2,344 contracts set on 
November 25, 2003.  Given that that high volume coincided with a 
bearish reversal day at a multiyear high, bulls need to be careful 
of a downtrend asserting itself here, as large volume reversals 
create the strongest support/resistance confluence levels.  On the 
other hand, trading at current levels could be a consolidation 
just below the highs, just as November's volume spike saw higher 
highs to follow.  In the meantime, the daily cycle oscillators 
remain deep within overbought territory and appear to be just 
commencing a rollover.  420 is trendline resistance, with 
confluence at 410.  The XAU dropped 2.12%, the HUI -3.28%.


Daily chart of the ten year note yield


Treasuries had a good day today, testing but not breaking the 
lower support yield trendline on a drop of 3.1 bps to bring the 
TNX to a close at 4.246%.  The daily cycle oscillators continues 
to show signs of tiring along its upphase here, and a break below 
the trendline should do it.  There was a very well-received 
auction of 5-year treasury notes, generating a bid-to-cover ratio 
of 2.51, with a high yield of 3.26%, median yield of 3.24% and low 
of 3.2%.  Dollar strength today lined up with weakness in metals, 
relative weakness in the YM, strength in the NQ and ES, and 
strength in US treasuries.


Daily NQ candles


The NQ added 12.50 or .83% to close at 1517 today, with NDX 
volatility closing at a new record closing low of 19.85, down 
4.29% today, and the COMPX volatility index, VXN , doing likewise 
at 21.92, -3.69%.  The NQ closed half a point below its session 
high, right on upper Bollinger resistance and upper rising channel 
resistance on the daily chart.  The daily cycle upphase crept 
higher, and without the last hour's ramp higher, the picture might 
look different.  The NQ was the equity leader all day, with 
smaller-cap higher-short-interest stocks leading the pack higher.  


30 minute 20 day chart of the NQ


The extremely low-volatility environment has the 30 minute cycle 
oscillators wreaking havoc as they switch directions after 
miniscule moves.  It seems like a long time since either the Macd 
or the 300 minute stochastics have traversed their entire range 
before reversing.

The rising support line was tested this morning on the dip that 
followed the cash open, but that support held and gave us a higher 
low for the day.  On a cyclical basis, the outlook has not 
changed, with the daily and 30 minute cycle oscillators in gear to 
the upside, still waiting for what I expect to be a terminal 
blowoff move to complete the daily cycle upphase.  Whether this 
comes from current or higher levels can only be guessed, but until 
it does, I'm inclined to believe that we will not have seen the 
top.  Just as we warned of the perils of dip buying during the 
2002 decline, top-picking remains tricky, countertrend trading in 
the current uptrend.  Until market and external risk has been 
successfully eradicated, low volatility markets will imply future 
corrections, but in the meantime, we need to respect the uptrend.  
Buying support or shorting resistance remains the strategy, and I 
reiterate the need for tight stops on either side of the trade.  
Short trades are at risk of getting caught by buy-programs and 
bear-panics, while long trades are at risk of the correction 
implied by the toppy oscillators, bullish percents and bottomy 
volatility indices.

Support is at 1507, 1497 and 1482.


Daily ES candles


The ES added 3.50 or .31% to close at 1125.50, breaking above the 
rising channel resistance line and closing with a bullish hammer 
as Bollinger resistance rose to 1132.  The uptrend strengthened 
again today, with a retest of yesterday's lows holding at 1114.75.  
While I do not expect the rally to persist for long on a dollar 
reversal in light of last year's trend of falling dollar/rising 
equities, such occurred today.  It's beginning to look like no 
matter what, equities go higher, period.  With the VXO closing at 
14.85 and the daily cycle oscillators on the verge of trending 
useless in overbought territory, I continue to smell a selloff 
behind every offer.  But the current rising channel is steep and 
solid, and traders need to remember all the old maxims-  the trend 
is your friend, and until this channel is broken with a print 
below 1100, dips will continue to look attractive...  with tight 
stops.  Short and hold using leverage in an uptrend is potentially 
lethal, so if you must, look to do so only with tight stops on a 
scalp basis.


20 day 30 minute chart of the ES


The ES gave up its 30 minute cycle downphase after the briefest of 
pullbacks, always within the rising channel, closing right on 
Bollinger resistance.  Support is now 1122, 1114, 1112, 1105 and 
1096.  I'm tempted to follow Linda's linguistic lead, and refer to 
resistance as "pause" levels.  Jeff has discussed 1132, and that 
looks very reasonable from here.  Again, I would expect a blowoff 
doji-type event to ring the bell at the top, but it doesn't have 
to be.


150-tick ES


The short cycle upphase either completed at the close or will do 
so at the open tomorrow.  With the 30 minute cycle nearing the top 
of its range and the short cycles maxxing out, I'd expect upside 
to be very limited from here, and would ordinarily call for a gap 
and crap open.  But, if you've been following the market closely 
this week, you'll understand my hesitation to prognosticate about 
pullbacks.  It *should* come at anytime, and soon.  Note the R2 
level generated by my charting app at 1127.25, another potential 
target.


Daily YM candles



20 day 30 minute chart of the YM


YM was the laggard of the group today, adding 3 or .03% to close 
at 10517.  No other comments, except that the outperformance of 
the more heavily shorted weaklings, former writeoffs such as NT, 
JDSU, XING, etc., is a sign of speculative mania associated more 
closely with tops than with bottoms.  To exemplify my point, I 
seriously doubt that the world sudden awoke to find renewed demand 
for networking capacity because of booming productivity in 
knowledge-based industries, unless it's to service all the call 
centers and IT jobs relocating to India.  That said, this is just 
anecdotal observation on my part.  I remain 100% suspect of this 
rally and smell a huge correction coming our way, but there is 
nothing more obvious than the price trend.  It has been going up, 
and it is far more profitable, far safer, and far wiser to follow 
it and miss the first drop and catch all the rest of them than to 
try to short all the way up.  If you need to short, do it with 
tight stops and be prepared to cover if you're wrong.  See you 
tomorrow in the Futures Monitor.


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

Rotation!

I'll never think I know "everything" that is taking place in the 
markets, but as today's action unfolded as we thought it might as 
outlined in last night's Index Trader Wrap, where the path of 
least resistance did find the NASDAQ-100 Tracking Stock 
(AMEX:QQQ) $37.68 +0.91% leading a recovery from morning weakness 
and trading new highs, it is somewhat apparent that the "once 
leading" Dow Industrials (INDU) 10,529 -0.09% lags a bit as it 
battles the upper-end of our regression channel.

While this market trades BULLISH, its also trading just like an 
inchworm moves!

That right!  The good old "inchworm analogy!"  

For those that haven't been with OptionInvestor.com all that 
long, a good article I think traders and investors might want to 
read is found in the Bailey's Basics section of the site, titled 
"The Market is my Inchworm."  
http://members.OptionInvestor.com/archive/intraday/2002/052302_3.asp

Clear your head of UP versus DOWN right now, and close your eyes 
and envision how an inchworm moves.  How does it move?  An 
inchworm is about an inch long.  It can only move in one 
direction one inch at a time.  To get from point A to point B, it 
moves by fully extending itself, then as if some type of suction 
cup is attached to its chin, it coils its body, by allowing its 
tail to move toward its head.  If the inchworm is going to move 
from point B to point C, it then has to anchor its tail, release 
its head, expand, until fully extended again.

Where am I going with this?

You observe, like I did today, that the NASDAQ-100 (NDX.X) +0.86% 
did extend itself further today, while the SPX +0.23% and OEX 
+0.27% edged up fractionally, while the INDU -0.09% traded 
fractionally lower.

All of these major indices make up what we call a "market."  
There's duplication of stocks in all of them, but as traders and 
even as investors, I'm seeing significant signs of rotation, all 
which can be very healthy for a longer-term bull market, where 
the bull market can last longer, and be more POWERFUL than we as 
humans can ever comprehend!

I'm not a biologist, I took a biology course in college, and I'm 
not sure what the internals of an inchworm is comprised of, but I 
envision it as being some sort of plasma material.  I would think 
this plasma material moves no different that blood might in the 
human body.  A blood cell at the top of my head right now, might 
be pumped down to my feet in the next couple of hours.

Rotation!  Maybe I should say "circulation!"

I want to FOCUS ON THE NEGATIVE right now.  The Dow Industrials 
(INDU).  Why all of a sudden, does the INDU stall out for the 
past 3-days?  I ask this of myself, and not just of you.

How does the Dow Industrials (INDU) move?  You and I know it is a 
PRICE weighted index, which is comprised of 30 stocks.  This 
means the HIGHER PRICED components provide more influence in how 
the INDU moves.  If each Dow component is a plasma/blood cell, 
then some are bigger than other right?

Tonight I'm gong to go back to this past weekend's "Ask the 
Analyst" column, as I think I can PROVE that rotation can be 
healthy, and that it does take place.  The Dow Industrials are 
easier to understand, as there are only 30 stocks that comprise 
it.

Check this out.

I established a portfolio of 2003's worst performing Dow 
components, simply to begin monitoring what a trader had asked 
about in regards to a strategy discussed, whereby a bullish 
investor bought the 5 worst performing Dow stocks of last year, 
as a perceived value play, that these 5 stocks might outperform 
the Dow Industrials itself in 2004, as they gravitated back 
toward the mean.  This is somewhat similar to "rotation" or 
"circulation" of capital isn't it?

How can I make an observation of circulation or rotation within 
the Dow?  Since I know it is a PRICE weighted index, I thought 
I'd add another set of data, and see how the HIGHEST PRICED 
components, which are more heavily weighted, are performing.

I also make the observation of how the Dow Industrials Index 
(INUD) itself, or as a whole (the inchworm) has performed since 
its December 31, 2003 close.  This is what YOU and I may be 
contemplating on trading right now (buy or sell) / (demand or 
supply).

Dow Industrials Component Breakdown - From 12/31/03 close

 

The 5 Dow components at the top of the above table were last 
year's worst performing Dow stocks (% loss), where I placed a 
hypothetical $1,000 (no rounded shares) in each stock.  This 
enables us to measure this group of stocks, where my observation 
is that these 5 stocks are currently up 2.99% since their 
December 31, 2003 close.  I've labeled these stocks with the term 
"tail" as these were the weakest stocks in 2003.

The next set of 5 stocks, were the 5 HIGHEST PRICED components at 
the end of 2003.  In essence, these 5 stocks are weighted more 
heavily when it comes to how the Dow Industrials (INDU) moves, or 
fluctuates in price.  These 5 stocks currently show a -0.44% 
decline for 2004, where my observation is that while the year is 
young, there has been some rotation away from these HIGHER priced 
stocks in the first four sessions of 2004.  Note, these stocks 
are not labeled with the term "head" as these were not the 
leading percentage gainers of 2004, but the observation of these 
HIGHER priced stocks may be an important observation in 
understanding why the Dow is moving as it is.

An finally, the benchmark, at the very bottom of the table is the 
Dow Industrials Index (INDU) itself, where for benchmarking 
purposes only, 1 "share" is entered as if purchased on the 
closing tick for December 31, 2003.

Conclusion:  Rotation is taking place, which appears to be 
bullish, based on the observation that the Dow Industrials (INDU) 
is up 0.72% year-to-day.  

Interpretation:  The market, or market participants may indeed be 
putting bullish capital to work, where VALUE is perceived in the 
Dow Industrials, in the form of buying last year's worst 
performing stocks.  It is uncertain if the buying is being 
created by bearish short covering, or overly bullish enthusiasm.

Note:  There is not a 4-lettered stock in the above table, which 
would indicate a NASDAQ listing.  Those stocks noted above are 
listed on the New York Stock Exchange.

Question:  For those that have been subscribers the past two 
months, up until December 29, 2003, when the NASDAQ Composite 
(COMPX) 2,077.68 +0.98%, what broad market index continue to 
trade new 52-week highs, after the NASDAQ Composite first traded 
the 2,000 level on December 3, 2003?  You would be correct if 
answering with .... the NYSE Composite (COMPX) 6,525.30 -0.24%.

Do you see where we're going?  The very broad NYSE was "the head" 
for the bulk of December, and now it looks as if BULLISH rotation 
takes place to the NASDAQ Composite (COMPX) 2,077.68 +0.98%.

It is uncertain, or undeterminable if the rotation is from new 
bullish buying, or bearish short covering.

Now... I profiled a BEARISH trade in the QQQ with a February $36 
put, prior to the QQQ breaking above $36.00 and to new 52-week 
highs.  I know from short interest reading on December 15, 2003 
that short interest in the QQQ was at annual highs, which has me 
somewhat suspicious that there are bears doing some buying.  I 
was WRONG to profile a QQQ February $36 put (as of today's 
close), but I am currently satisfied with recent bullish comments 
and profiling of QQQ swing trades, as I (Jeff Bailey) made an 
attempt to get back on the right side of the MARKET's trade.

How can an overall bullish market continue to build?  As it 
relates to how an inchworm moves (up the tree, or down the tree) 
it appears that December's "tail" or the NASDAQ is moving toward 
December's "head" and should the head be able to anchor itself, 
another expansionary move could occur, in the direction of trend.

Market Snapshot / Internals - 01/07/04 Close

 

Volume levels remained brisk as the first full week of post-
holiday trade reaches a mid-point, where intra-day A/D breadth 
comparisons between the NYSE and NASDAQ continue to suggest 
bullish rotation toward NASDAQ stocks.  

NYSE and NASDAQ NH/NL readings - 12/01/03-01/07/04

 

Observations noted in our Dow Industrials component analysis may 
be present in the daily NH/NL breadth readings at both the NYSE: 
and NASDAQ.  In the 5th column from the left, I've placed a pink 
box around some higher number of new lows in the NASDAQ, where we 
see this number diminishing.  New highs at the NASDAQ have been 
building, and suggests bullish leadership returning.  This 
bullish leadership would be measured from the NSDQ NH/NL 10-day 
average ratio at the far right column, when the 10-day average 
showed a 3-box reversal back up from a 90% reading to 96%.  The 
NYSE NH/NL 10-day Avg. ratio (8th column from left) has been in a 
column of X as depicted by the color green.  5-day average ratios 
are shown to give a similar observation of a 5-day to 10-day 
moving average crossover.  The 10-day average ratio is very 
similar to how a point and figure (supply/demand) chartist charts 
the bullish % indicators.  The chart's full range is from 0% to 
100%.  Higher ratio readings give the observation of bullish 
leadership.

I've marked the daily NH columns with "head" and NL columns with 
"tail" as if to visualize an inchworm, which based on 
observation, usually moves with head pointed toward direction of 
travel.  Current observation is that the inchworm is moving 
higher, or in investment terms ... bullish.  

Traders are correct in their thought that markets will rise, and 
markets will fall.  Leadership can turn from bullish to bearish.  
The answer to the question of how long the current leadership can 
persist is one that has never been answered.

Pivot Analysis Matrix - 

 

I want to quickly follow up on some of last night's comments 
regarding the pivot matrix.  The S&P Banks Index (BIX.X) 339.02
-0.3% session low of 337.61 did find intra-day support at its 
MONTHLY Pivot (337.88) and WEEKLY S1 (337.11) correlations, where 
coincidentally, the SPX/OEX found their session lows.  I did not 
highlight in pink the SPX/SPY lows, but both were very close to 
the 1,118 and 112 levels observed last night.

I've highlighted today's low in the QQQ of $37.07.  Late last 
night, I continued to do some investigating in the QQQ, trying to 
disprove my bullish thoughts.  It was purely by chance that I saw 
the NASDAQ 100 Volatility Index (VXN.X) 21.91 -3.73% had dropped 
sharply in yesterday's trade, and remembered reading a comment 
that bulls were buying calls in exuberant fashion.  However, my 
checks last night showed that the January $37 puts were the most 
actively traded option in Tuesday's trade, which had me writing 
in last night's Market Monitor, that this might have been a 
bullish "tell" for today's trade, not unlike analysis in our 
12/17/03 Index Trader Wrap "Watch out for this tomorrow" where we 
had picked up on similar option activity just prior to an option 
expiration.  
http://members.OptionInvestor.com/Itrader/marketwrap/iw_121703_1.ASP

Our analysis at that time was that for the VXN.X to fall, with 
put option volume being heavy, it may not have been overly 
bullish traders in calls, but perhaps covered put sellers that 
were short the underlying QQQ, about to call its quits as the 
trade moved against them.  Again... by selling puts, a trader is 
OBLIGATING themselves to buy the underlying back at $37.00.  It 
has been my market training that it is institutions that tend to 
SELL options, while the "retail trader" is often found buying 
puts and calls as risk in the option is certain to capital 
exposed.  I make the observation that today's lows in the QQQ 
were $37.07, where when tied to the more active selling in Jan 
$37.00 may hint of a $37.00 floor in the QQQ.

By NO MEANS is a bullish trader now to assume the work "floor" 
means buy with reckless abandon and become complacent.  However, 
yesterday's option activity, combined with decline in the VXN.X, 
and today's price action is very similar to what was noted the 
evening of 12/17/03, but more importantly.... 12/18/03!

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

 

One path of near-term resistance in the MONTHLY R1 was taken out 
to the upside with some conviction in today's trade.  In the 
Pivot Matrix I did "dash green" the MONTHLY R1 and DAILY S1 as 
tentative support and these two levels can be tied in with the 
MONTHLY 19.1% retracement of $37.29 and MONTHLY R1 of $37.36.  On 
a 5-minute bar chart, I noticed that when the QQQ pulled back 
from between 02:20 PM EST and 02:25 PM EST, the QQQ kissed $37.36 
then traded higher into the close.  This action at $37.36 may 
make sense as it relates to how an institutional computer 
"thinks" and manages inventory.  At 52-week highs, it is my 
thought that bullish inventory (supply) may be low, and when that 
level is taken out, then inventory must be replenished (demand).  
Eventually, at some point in the future, supply will outstrip 
demand, but it wasn't today.

S&P 500 Index Chart - Daily Intervals

 

I'm running way short on time and past deadline, but a bull would 
not want to see the SPX much below the 1,105 level in my opinion.  
I showed a futures chart if the e-mini's, and they too are 
approaching a "zone of resistance" at the SPX 1,130 level, where 
trader would be alert to some selling.  No sign of weakness that 
I can find in this chart, but some rotation taking place I'm 
sure.  To get a MONTHLY R2, I'm thinking the S&P Banks Index 
(BIX.X) needs to get back in gear.  Again... everything has made 
a VERY nice run, but if looking for further strength near-term 
above MONTHLY R1, then the BIX.X is a sector I'd be monitoring.

Dow Industrials (INDU) Chart - Daily Intervals

 

"Out of nowhere" the INDU found support below the psychological 
10,500.  Still bumping against a zone of resistance at the upper-
end of our bullish regression channel.  This doesn't mean the 
INDU can't break higher, but may hint that some bullish profits 
are being taken, or rotation to lower priced components that 
aren't having as much bullish impact as HIGHER priced components 
in the price-weighted INDU.

Jeff Bailey


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

An Organized Approach to Trade Selection
by Mark Phillips
mphillips@OptionInvestor.com

Last week, I introduced what I think is the best online trade-
screening tool.  A more accurate description would be to call it 
the best STARTING POINT in the trade selection process.  There is 
a great scanning tool on the StockCharts site 
(www.stockcharts.com), with numerous pre-defined scans.  The scans 
are broken down into three main categories; Technical Indicators, 
Candlestick Patterns and P&F Alerts.  The top-level page with all 
the pre-defined scans can be accessed from this link 
(http://stockcharts.com/def/servlet/SC.scan), giving us plenty of 
options to choose from.

Some traders are big moving average fans, choosing to zero in on 
50-dma/200-dma crossovers.  Others may want to use crossovers on 
the MACD or trade a specific candle pattern.  The scans provided 
encompass all of those options and quite a few others.  It is the 
P&F scans that I find the most useful though, as it gives me a 
good view of the supply/demand relationship, where price action 
remains the sole focus.  Scroll towards the bottom of the 
Predefined Scans page to find all the P&F Scans and then pick the 
one you want.  For our discussion here today, I'm going to use the 
Triple Top Alerts scan.  We've still got a very bullish market, so 
let's stick with the overall market trend as long as it lasts.

Note that the results of the scan are broken down by exchange, so 
we can pick just NYSE stocks or just NASDAQ stocks if we prefer, 
or we can just click on the number under the "Total" heading to 
get them all.  Since I can see that there are over 300 Triple Top 
Alerts on today's scan, I'm going to select just the NASDAQ 
stocks, of which there are still 119.  Clicking on the "119" 
brings up another page that lists all of the NASDAQ stocks that 
are currently on a Triple Top Breakout.  Clearly going through 
that many charts would take way too much time, but we can quickly 
sort the list to remove the wheat from the chaff.  The list of 
stocks can be sorted by any of the fields listed, but my 
preference is to eliminate the less desirable candidates by 
sorting on the closing price.  All we have to do is click on the 
"Close" link/header on top of the column that shows the closing 
price and the list of stocks will be sorted by closing price, with 
the highest price stocks at the top.  Click "Close" again and the 
list will be re-sorted, with the lowest price stocks at the top.  
See how easy that is?  Sometimes, I'll sort by volume, as that 
will push all the low-volume stocks to the bottom of the page.

My basic criteria for considering a stock "tradable" is that it 
needs to be above $20 and have volume over 300K.  Over the years, 
I've built up a list of stocks that I am familiar with and I 
confine my trading activities to those stocks.  I've found that I 
am better able to evaluate a trade when I have an understanding of 
the way that particular stock tends to trade.  Of course, even 
that list is rather cumbersome if I am going to look through the 
charts of each stock on a daily basis.  That's where the screening 
tool comes in.  After sorting the list by closing price, I'll scan 
down the list looking for those that are on my master list.  I 
keep a notepad next to the computer and just jot down the symbols 
under the heading "Triple Top".  Looking at today's list, here are 
a few that are on my master list, as well as the Triple Top list: 
CEPH, BBOX, YHOO, UTSI, CSCO and NVDA.

As you can see, this quick 5-minute scan narrowed the field of 
more than 100 stocks down to only a half-dozen that I then know I 
want to seriously investigate.  Conveniently, the list cuts a 
broad swath through the technology sectors, covering Biotechs 
(CEPH), Internets (YHOO), Networking (BBOX, UTSI, CSCO) and 
Semiconductors (NVDA).  That sets the stage for the sector 
evaluation to follow.  But first, I need to take the time to 
review the daily/weekly/intraday charts of each of the stocks.  
This isn’t an in-depth study, but a cursory view that gives me a 
feel for whether the stocks are overbought or just beginning their 
move, whether volume has been strong or weak and the proximity of 
important moving averages and support/resistance.  All I have to 
do is jot down a couple notes on each one and then I'm ready to 
move on to the next step, that of evaluating the sector.

Not surprisingly, this exercise starts with a view of the PnF 
chart of each of the sectors represented in my list of stocks.  
That means for today's list that I need to take a look at the 
Internet index ($INX), the Semiconductor index ($SOX), the 
Networking index ($NWX) and the Biotechnology index ($BTK).  A 
quick perusal of each of those PnF charts shows me that the $INX, 
$NWX and $SOX indices are all in the midst of solid upward moves, 
while the $BTK has had a slight pullback, but overall is still 
looking strong.  So the net result is that my 10-minute scan 
yielded 6 stocks that I'm familiar with, all of which look strong 
on the PnF charts, with each of their respective sectors also 
looking strong.  That's a great leg up for that day's research, 
don't you think?

The next step is to actually bring up the real-time charting 
program (eSignal, Qcharts, TC2000, Tradestation, etc.) and look at 
the charts in more detail.  This is where we would look at the 
relative strength of the individual stocks relative to their 
indices, evaluate support and resistance on both the stock and the 
index, and try to determine entry points, stop levels and evaluate 
risk and reward.  But that's an exercise that we'll have to leave 
for a future visit.  I've run out of time to get this in for 
publication tonight, so I must cut this short.

Hopefully this gives you some insight into how a very basic 
screening tool can be applied to ferret out a handful of solid 
trade candidates, so that our time is spent doing concrete 
evaluation and research, not in going bleary-eyed from looking at 
chart after chart after chart, ad nauseum, trying to separate the 
few winners from the sea of mediocre choices.  The computer should 
be a tool to help streamline our work process, not make it more 
tedious.  Stockcharts.com has done a great job of helping us put 
the computer to use in that manner.  So dive in and get some 
experience playing with the different scans available on the site 
and we'll delve into the final stage of the selection process next 
week.

Have a great week!

Mark


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The Option Investor Newsletter                Wednesday 01-07-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: GD
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - GD
Spreads, Combinations & Premium-Selling Plays: A Great Start!
Watch List: New Highs and Old Supports
Market Posture: Watching the Paint Dry


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

GD - CALL
Raise To 85.90 from 84.99


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

None

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

None


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and Alan Knuckman specialize in live assistance of stock*, 
option* and futures traders. The combination of the proven Man 
Financial global presence and the convenience of one group for 
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success.

Live Broker and Online Trading Available     888-281-9569

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

General Dynamics - GD - close: 91.00 chg: +1.90 stop: 85.90 *new*

-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)


- Most Recent Update (Tuesday, Dec. 23, 2003) -
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.  


- Play of the Day Comments -
The strength in both the DFI and DFX defense sector indices were 
bolstered by a strong day for GD, which climbed more than 2 
percent.  The early morning rally came on strong volume and late 
afternoon action suggested more buying is expected tomorrow.  Now 
that GD has cleared resistance in the 90-91 area it has a clean 
run toward the 95-96 region.

- Suggested Options - 
Traders can look at the February and May strikes. We're suggesting 
the 
February 85s or 90s as the best play.

BUY CALL FEB 85*GD-BQ OI=1009 at $6.80 SL=4.00
BUY CALL FEB 90 GD-BR OI= 869 at $3.20 SL=1.65
BUY CALL FEB 95 GD-BS OI= 186 at $1.10 SL=0.55
BUY CALL MAY 90 GD-ER OI=3678 at $5.10 SL=3.25
BUY CALL MAY 95 GD-ES OI= 180 at $2.85 SL=1.45

Annotated Chart:

 


Picked on December 21 at $88.78
Change since picked:     + 2.22
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million 
Chart =



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Financial global presence and the convenience of one group for 
all trading needs provide customers with the tools needed for 
success.

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*********************************************
SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS
*********************************************

A Great Start!
By Ray Cummins

The stock market is off to a great start in 2004 and traders are
already looking at the early results as a precursor to the trend
for the year.

On Wednesday, equities closed mixed with the blue-chip average
in the red while the hi-tech index climbed higher.  Altria Group
(NYSE:MO), ExxonMobil (NYSE:XOM), and 3M (NYSE:MMM) helped pull
the Dow 9 points lower to 10,529.  On the technology exchange,
an upgrade of Intel (NASDAQ:INTC) boosted the NASDAQ, which rose
20 points to end at 2,077.  The broad S&P 500 closed up 2 points
at 1,126 despite sharp declines in oil and gold stocks.  Winners
had a slight edge over losers on the Big Board and the positive
breadth was somewhat more pronounced on the technology exchange.
Total volume on the NYSE was 1.7 billion and 2.2 billion on the
NASDAQ.  In the U.S. bond market, treasury prices were nearly
unchanged.  The 10-year note closed up 6/32, with its yield at
4.25%.


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

SUMMARY OF CURRENT POSITIONS - AS OF 01/06/03

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

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.


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) 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 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 trade.
  
 
Naked Puts
**********

Stock   Strike Strike Cost  Current   Gain    Max    Simple
Symbol  Month  Price  Basis  Price   (Loss)  Yield   Yield

ONXX     JAN    22    22.00  29.87    0.50   5.66%   2.27%
QCOM     JAN    45    44.25  54.23    0.75   3.64%   1.69%
RMBS     JAN    20    19.50  33.90    0.50   6.56%   2.56%
FARO     JAN    17    17.05  30.83    0.45   9.13%   2.64%
FLML     JAN    20    19.70  29.20    0.30   5.33%   1.52%
FRX      JAN    55    54.25  61.71    0.75   3.73%   1.38%
MGAM     JAN    35    34.25  42.80    0.75   6.50%   2.19%
MSTR     JAN    45    43.85  55.26    1.15   7.00%   2.62%
NCEN     JAN    33    32.88  38.23    0.50   4.42%   1.52%
NFLX     JAN    40    39.40  59.61    0.60   5.50%   1.52%
PLMD     JAN    20    19.75  27.28    0.25   4.61%   1.27%
AAPL     JAN    20    19.65  22.09    0.35   8.32%   1.78%
FARO     JAN    22    22.10  30.83    0.40   9.05%   1.81%
FCS      JAN    22    22.25  25.42    0.25   5.76%   1.12%
IMDC     JAN    43    42.42  45.97    0.95  10.97%   2.24%
OSTK     JAN    17    17.15  18.99    0.35  10.56%   2.04%
YHOO     JAN    42    41.85  47.24    0.65   7.21%   1.55%


Naked Calls
***********

Stock  Strike Strike Cost  Current   Gain    Max     Simple
Symbol Month  Price  Basis  Price   (Loss)  Yield    Yield

CECO     JAN    45   45.60  44.95    0.60   6.85%    1.32%
CRDN     JAN    45   45.40  39.22    0.40   5.27%    0.88%
PPDI     JAN    27   27.80  27.85   (0.05)  0.00%    1.08%
CRDN     JAN    40   40.30  39.22    0.30   6.73%    0.74%
QLGC     JAN    55   55.55  52.36    0.75   7.56%    1.35%

The majority of positions in the bearish "premium-selling"
portfolio are on the "early-exit" list.  Qlogic (NASDAQ:QLGC)
and Ceradyne (NASDAQ:CRDN), at the $45 strike, are the only
plays that remain open.  With any luck, maybe one position
will survive the recent bullish activity?!?


Put-Credit Spreads
******************

Symbol  Pick   Last   Month L/P S/P Credit  C/B    G/L   Status

NBIX    53.83  54.55   JAN  45  50   0.70  49.30   0.70   Open
NE      37.01  35.83   JAN  32  35   0.30  34.70   0.30   Open?
WGO     60.60  69.70   JAN  50  55   0.50  54.50   0.50   Open
DNA     91.20  92.34   JAN  80  85   0.60  84.40   0.60   Open
DIGE    38.47  39.24   JAN  30  35   0.70  34.30   0.70   Open
MRO     31.06  34.09   JAN  27  30   0.35  29.65   0.35   Open
GPRO    36.47  34.10   JAN  30  35   0.75  34.25  (0.15) Closed
LRCX    32.30  33.68   JAN  25  30   0.45  29.55   0.45   Open

Gen Probe (NASDAQ:GPRO) became an "early-exit" candidate Monday
when the issue gapped below the sold (put) strike on a downgrade
by Merrill Lynch.   Noble (NYSE:NE) remains on the "watch" list
and should be closed on any further downside movement.


Call-Credit Spreads
*******************

Symbol  Pick   Last   Month L/C S/C Credit  C/B    G/L   Status

POWI    31.41  33.97   JAN  40  35   0.75  35.75   0.75   Open?
MERQ    46.03  50.73   JAN  55  50   0.80  50.80   0.07   Open?
MXIM    47.10  51.89   JAN  55  50   0.75  50.75  (1.14) Closed
CERN    37.85  38.50   JAN  45  40   0.55  40.55   0.55   Open
OSIP    32.25  32.62   JAN  40  35   0.55  35.55   0.55   Open

On Tuesday, Maxim Integrated Products (NASDAQ:MXIM) became the
latest victim of the NASDAQ rally.  Bearish positions in Capital
One Finance (NYSE:COF) and Cognizant Technologies (NASDAQ:CTSH)
have previously been closed for small losses.
  

Synthetic Positions
*******************

No Open Positions
 

Debit Straddles
***************

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 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.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.  The positions with "*" will be
included in the weekly summary.  Those with "TS" (Target-Shoot)
are below our minimum monthly return, but may offer a favorable
entry price with a limit order, due to the daily volatility of
the underlying issue.

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

BULLISH PLAYS - NAKED PUTS

All of these issues have robust option premiums and relatively
favorable technical indications.  However, current news and market
sentiment will have an effect on these stocks, so review each play
thoroughly and make your own decision about its future outcome.

WARNING: THE RISK IN SELLING UNCOVERED 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.

**************
ASKJ - Ask Jeeves  $22.05  *** Rally Mode! ***

Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search,
providing consumers with authoritative and fast ways to find
relevant information to their everyday searches.  Ask Jeeves
deploys its search technologies on Ask Jeeves (Ask.com and
Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com).
In addition, to its internet sites, Ask Jeeves syndicates its
monetized search technology and advertising units to a network 
of affiliate partners.  The company is based in Emeryville,
California, with offices in New York, Boston, New Jersey, Los
Angeles, London and Dublin.

ASKJ - Ask Jeeves  $22.05

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 20    AUK MD    1283   0.25  19.75  10.8%   1.3% *
SELL PUT  FEB 17.5  AUK NW      97   0.35  17.15   5.0%   2.0%
SELL PUT  FEB 20    AUK ND     241   1.00  19.00   8.7%   5.3%


**************
CECO - Career Education  $46.56  *** Trend Reversal! ***

Career Education Corporation (NASDAQ:CECO)) is the world's largest
on-campus provider of private, for-profit postsecondary education
and has a rapidly growing presence in online education.  CEC's
Colleges, Schools and Universities Group operates 51 campuses in
the U.S., Canada, France, the United Kingdom and the United Arab
Emirates and offers master's degree, bachelor's degree, associate
degree and diploma programs in the career-oriented disciplines of
visual communication & design technologies, information technology,
business studies, culinary arts and health education.  The Online
Education Group's AIU Online Division offers master's degree,
bachelor's degree and associate degree programs in information
technology, business administration, visual communication and
education.

CECO - Career Education  $46.56

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 40    CUY MH    2798   0.25  39.75   6.2%   0.6% *
SELL PUT  JAN 42.5  CUY MV     507   0.40  42.10   8.1%   1.0%
SELL PUT  JAN 45    CUY MI     929   1.05  43.95  17.6%   2.4%


**************
IMDC - Inamed  $49.80  *** Premium-Selling Only! ***

Inamed (NASDAQ:IMDC) is a global medical device company that
develops, manufactures and markets a diverse line of products
that enhance the quality of people's lives.  The company has
three principal product lines: breast aesthetics, consisting
primarily of breast implants and tissue expanders sold largely
for use in plastic and reconstructive surgery; facial aesthetics,
consisting primarily of collagen and other dermal fillers sold
largely to dermatologists and plastic surgeons, and obesity
intervention, consisting of products for use in treating severe
and morbid obesity.  The company also offers collagen products
for use by medical manufacturers.

IMDC - Inamed  $49.80

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 43.37 HCZ MW    2162   0.50  42.88  10.9%   1.2% *
SELL PUT  JAN 45    UZI MI     211   0.70  44.30  13.5%   1.6%


**************
NFLX - Netflix  $62.24  *** New All-Time High! ***

Netflix (NASDAQ:NFLX) is an online entertainment service in the
United States that provides more than 600,000 subscribers access
to a comprehensive library of more than 11,500 movie, television
and other filmed entertainment titles.  The company's standard
subscription plan allows subscribers to have three titles out at
the same time with no due dates, late fees or shipping charges.
Subscribers can view as many titles as they want in a month and
they select these titles at the firm's Website (www.netflix.com)
aided by its proprietary CineMatch technology.  They receive them
on DVD by first-class mail and return them to the company at their
convenience using prepaid mailers.  Once a title has been returned,
Netflix mails the next available title in a subscriber's queue.

NFLX - Netflix  $62.24

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 55    QNQ MK    3134   0.35  54.65   5.9%   0.6% *
SELL PUT  JAN 60    QNQ ML    1851   1.45  58.55  18.3%   2.5%


**************
NTES - NetEase.com  $45.07  *** Recovery In Progress! ***

NetEase.com (NASDAQ:NTES) is a China-based Internet technology
company that pioneered the development of applications, services
and other technologies for the Internet in China.  The NetEase Web
sites, operated by a company affiliate, organize and provide access
to 18 content channels through distribution arrangements with more
than one hundred international and domestic content providers.  In
addition, the NetEase Internet sites offer a variety of products
and services, including Instant Messaging (Popo), Dating, Love,
Alumni and Personal Home Page.  These products and services enable
users to communicate about interests and areas of expertise.  At
the end of March 2003, the number of registered users of NetEase
Web sites reached 114 million with the average number of daily page
views over 370 million.

NTES - NetEase.com  $45.07
    
PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 40    NQG MH    2585   0.30  39.70   6.9%   0.8% *
SELL PUT  JAN 45    NQG MI    1117   1.90  43.10  29.1%   4.4%


**************
OVTI - OmniVision  $60.55  *** Consolidation Complete? ***

OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells
high performance, high quality and cost efficient semiconductor
imaging devices for computing, telecommunications, industrial,
automotive and consumer electronics applications.  The company's
main product, an image sensing device called a CameraChip, is used
to capture an image in cameras and camera-related products in a
range of imaging applications such as personal computer cameras,
digital still cameras, security and surveillance cameras, personal
digital assistant cameras, mobile phone cameras, and cameras for
automobiles and toys that incorporate both still picture and live
video applications.

OVTI - OmniVision  $60.55

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 55    UCM MK    1323   0.40  54.60   6.4%   0.7% *
SELL PUT  JAN 60    UCM ML    1873   1.70  58.30  20.4%   2.9%


**************
SEPR - Sepracor  $26.14  *** A Big Day! ***

Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company
dedicated to treating and preventing human disease through the
discovery, development and commercialization of pharmaceutical
compounds, including product candidates directed toward serving
unmet medical needs.  The firm's proprietary compounds are either
single-isomer or active metabolite forms of existing drugs, which
Sepracor refers to as improved chemical entities, or new chemical
entity compounds, which are unrelated to current products.  

SEPR - Sepracor  $26.14

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  JAN 25    ERQ ME    2890   0.55  24.45  17.0%   2.2%
SELL PUT  FEB 20    ERQ ND     281   0.40  19.60   4.8%   2.0% *
SELL PUT  FEB 22.5  ERQ NX     316   0.90  21.60   7.9%   4.2%


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

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

***************
COCO - Corinthian Colleges  $60.73  *** On The Rebound! ***

Corinthian Colleges (NASDAQ:COCO) is one of the largest for-profit
post-secondary education companies in the United States.  The firm
serves the large and growing segment of the population seeking to
acquire new, career-oriented education to become more qualified
and marketable in today's demanding workplace environment.  The
company had more than 43,200 students enrolled as of June 30, 2003.
At year-end 2003, the company operated 69 colleges and two training
centers in 21 states, including 18 in California and 12 in Florida.

COCO - Corinthian Colleges  $60.73

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-50.00  UCS-NJ  OI=240  ASK=$0.40
SELL PUT  FEB-55.00  UCS-NK  OI=520  BID=$1.00
INITIAL NET-CREDIT TARGET=$0.65-$0.70
POTENTIAL PROFIT(max)=15% B/E=$54.35


**************
KOSP - KOS Pharmaceuticals  $45.30  *** Next Leg Up? ***

KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty
pharmaceutical company engaged in the development of proprietary
prescription products for the treatment of chronic cardiovascular
and respiratory diseases.  The company manufactures its marketed
products, Niaspan and Advicor, and markets such products directly
through its own specialty sales force and through a sales force
provided by a contract sales organization.  Their cardiovascular
products are based on controlled-release, once-a-day, oral dosage
formulations.  The company's respiratory products in development
consist of aerosolized inhalation formulations to be used mainly
with its proprietary inhalation devices.

KOSP - KOS Pharmaceuticals  $45.30
  
PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-35.00  KQW-NG  OI=346   ASK=$0.45
SELL PUT  FEB-40.00  KQW-NH  OI=1149  BID=$1.00
INITIAL NET-CREDIT TARGET=$0.60-$0.70
POTENTIAL PROFIT(max)=14% B/E=$39.40


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

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option 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 options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
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 price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond 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.

***************
CFC - Countrywide Financial  $73.00  *** Profit-Taking Underway! ***

Countrywide Financial (NYSE:CFC), formerly Countrywide Credit
Industries, is a holding company that originates, purchases,
sells and services mortgage loans through its major subsidiary,
Countrywide Home Loans.  The company's mortgages are principally
prime credit first-lien mortgage loans secured by single one- to
four-family residences (prime credit first mortgages).  The firm
also offers home equity loans and sub-prime credit loans.  CFC,
through its other wholly owned subsidiaries, offers products and
services that are largely complementary to its mortgage banking
business, including lender-placed mortgage insurance, insurance
brokerage, mortgage-backed securities brokerage and underwriting,
brokerage of bulk servicing transactions, loan processing and
servicing in foreign countries, and retail banking.  The company
conducts its business through four segments: Insurance Segment,
Capital Markets Segment, Global Segment and Banking Segment.

CFC - Countrywide Financial  $73.00

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  JAN 75    CFC AO    1570   0.80  75.80   8.7%   1.1% *
SELL CALL  FEB 80    CFC BP     723   1.20  81.20   3.5%   1.5%


**************
HOV - Hovnanian Enterprises  $80.30  *** Sector Slump! ***

Hovnanian Enterprises (NYSE:HOV) constructs and sells single-family
detached homes and attached condominium apartments and townhouses
in more than 196 new home communities in New Jersey, Pennsylvania,
New York, Virginia, Maryland, North Carolina, Texas and California.
The firm offers a wide variety of homes that are designed to appeal
to first-time buyers; first- and second-time, move-up buyers; luxury
buyers; active adult buyers, and empty nesters.  In addition, the
company provides financial services, including mortgage banking and
title services to the homebuilding operations' customers.  The firm
does not retain or service the mortgages that it originates, but
rather sells the mortgages and servicing rights to investors.

HOV - Hovnanian Enterprises  $80.30

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  JAN 85    HOV AQ    1774   0.50  85.50   5.4%   0.6% *
SELL CALL  FEB 90    HOV BR     905   1.50  91.50   4.2%   1.6%


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

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

**************
ANF - Abercrombie & Fitch  $24.90  *** Bearish Retailer! ***

Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries
as specialty retailers, operates stores selling casual apparel,
personal care and other accessories for men, women and kids under
the Abercrombie & Fitch, Abercrombie, and Hollister Co. brands.
The company operates over 450 stores in the United States.  A&F's
stores and point-of-sale marketing are designed to convey the
principal elements and personality of each brand.  Store design,
furniture, fixtures and music are planned and coordinated to
create a shopping experience that is consistent with the A&F
lifestyle.

ANF - Abercrombie & Fitch  $24.90

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-30.00  ANF-BF  OI=669   ASK=$0.15
SELL CALL  FEB-27.50  ANF-BY  OI=6384  BID=$0.40
INITIAL NET-CREDIT TARGET=$0.25-$0.35
POTENTIAL PROFIT(max)=11% B/E=$27.75


**************
MANH - Manhattan Associates  $27.00  *** In A Trading Range? ***

Manhattan Associates (NASDAQ:MANH) is a global leader in providing
supply chain execution solutions.  The company enables operational
excellence through our warehousing and distribution, transportation
and trading partner management applications.  The firm's integrated
solutions leverage state-of-the-art technologies, innovative supply
chain practices and their domain expertise to enhance performance,
profitability and competitive advantage.  Manhattan Associates has
licensed more than 870 customers from more than 1,300 facilities
worldwide, which include some of the world's leading manufacturers,
distributors and retailers.

MANH - Manhattan Associates  $27.00

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-35.00  MQR-BG  OI=0   ASK=$0.25
SELL CALL  FEB-30.00  MQR-BF  OI=79  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.50-$0.60
POTENTIAL PROFIT(max)=11% B/E=$30.50


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

SEE DISCLAIMER - SECTION 1

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


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

New Highs and Old Supports

Legg Mason - LM - close: 80.81 change: +0.41

WHAT TO WATCH:  Investment services firm Legg Mason has a pretty 
decent stock price of its own.  Shares have rallied strongly from 
support near $75 and now the stock has broken above its simple 
50-dma and the $80 level in just the last two days.  Volume has 
been pretty decent for the last several days as shares climbed 
higher.  There is some potential resistance at 82.50 but odds are 
good that LM is headed for the $85 level, which was tough 
resistance last November.  Earnings for LM are expected on 
January 21st.

Chart=


---

Vimpel Communication - VIP - close: 77.79 change: +0.46

WHAT TO WATCH:  Late last year VIP turned in a nice breakout over 
resistance at $70 after CSFB upgraded the stock from "neutral" to 
"out perform" and raised their price target to $80.  Shares are 
almost at $80 now.  The stock looks a little extended from its 
mid-December low but traders have been buying the dip (see 
intraday chart).  Another bounce from $75 might be an aggressive 
entry point for bulls.

Chart=


---

Zebra Technologies - ZBRA - close: 66.75 change: +1.10

WHAT TO WATCH:  The Santa Claus rally is still in effect for 
shares of ZBRA.  The stock bottomed in mid-December near $60 and 
hasn't stopped.  The recent pull back was met with new buying 
pressure near the $65 level.  Wednesday's session proved to be a 
new all-time closing high for the stock.  Momentum traders may 
want to keep an eye on this one.  Aggressive players could play 
the current trend towards $70 with a tight stop under $65.

Chart=


---


Gtech Holdings - GTK - close: 50.50 change: +0.55

WHAT TO WATCH:  Known for its online lottery systems, GTK has 
proven to be a good bet for investors.  The stock recently 
bounced off the bottom of its rising channel and today's move 
broke resistance at $50.00.  This looks like an entry point to 
ride its next leg higher.

Chart=


---

Pharmaceutical Research - PRX - close: 64.35 change: -1.08

WHAT TO WATCH:  Last September shares of PRX soared after 
announcing it would begin shipping a new generic version of 
paroxetine.  Unfortunately, the stock appears to have put in a 
multi-month top under the $75 mark.  Shares have been 
consolidating the last several days just above the top of the 
gap, which traditionally acts as support or resistance.  Should 
PRX break the $64.00-63.50 level odds are good it will fill the 
gap and hit the $59.00 level.  Coincidentally, its simple 200-dma 
is quickly approaching the $59 mark.

Chart=



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

GPT $36.01 +0.28 - GPT has charged right back towards resistance 
at 36.50.  If it fails here the stock will have formed a wide 
double-top.


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

Watching the Paint Dry
by - Nich Sheldon

Okay, watching paint dry is about as exciting as watching grass 
grow.  Better yet, it's about as exciting as watching the trading 
session today.  Bulls outnumbered bears -in comparison of the 
various sector indices - by a margin of 17:10.

The DDX Disk Drive Index tallied the highest gains of the day, 
adding +2.95 percent by market close.  Today's bullish activity 
marks the fourth consecutive up day for the index.

Second on the leader board, was the XAL Airline index, which added 
2.44%.  The move follows yesterday's big rally that appears to 
have been fueled by the industry's recently announced its December 
traffic numbers.

The NWX Networking Index tackled a +2.03 percent gain for 
Wednesday, extending its winning streak to eight consecutive days.  
Traders should note that there is some bearish/bullish convergence 
on the stochastics indicator.  We suspect that 280 should serve as 
the next round number psychological resistance level, as this was 
the case in March of 2002.  A break above this level and we 
wouldn't be surprised to see a run to 300.  

Gold Bugs witnessed the biggest Bear sighting on the day as the 
XAU Gold and Silver Index closed -2.11 percent lower.  This is the 
second day of losses for the gold sector.  Today's -2.34 point 
drop was too much to keep the index over the simple 10-DMA and we 
suspect that the index may consolidate back toward its simple 50-
dma.

The OIX Oil Index ended an eight-day winning streak as the index 
finally underwent some overdue profit taking.  The OIX dropped   -
1.37 percent by the closing bell but remains inside its rising 
channel.  The past three times the OIX hit the 325-330 range 
(2002-04) we saw profit taking back to 310.  We are interested in 
seeing if the simple 10-DMA (approximately 320) can hold as 
support for the index.  Bearish traders could target a retest of 
310 if 320 cannot hold as support.


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