Option Investor

Daily Newsletter, Thursday, 01/08/2004

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The Option Investor Newsletter                Thursday 01-08-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Resistance Targets Hit
Futures Markets: Dollar Dives, Equities Rise
Index Trader Wrap: Indices finish higher on valuation concerns
Market Sentiment: Will Investors Sell The News?

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      01-08-2004           High     Low     Volume Advance/Decline
DJIA    10592.44 + 63.40 10592.59 10530.07 2.52 bln   2000/1233
NASDAQ   2100.25 + 22.60  2100.25  2078.05 2.67 bln   1981/1262
S&P 100   562.88 +  3.57   562.88   559.02   Totals   3981/2495
S&P 500  1131.92 +  5.59  1131.92  1124.91
W5000   11009.62 + 52.50 11009.62 10943.02
RUS 2000  579.62 +  5.00   580.22   574.62
DJ TRANS 3029.70 -  4.40  3037.44  3022.89
VIX        15.61 +  0.11    15.68    15.32
VXO (VIX-O)14.46 -  0.39    15.39    14.42
VXN        21.89 -  0.02    22.16    21.36
Total Volume 5,497M
Total UpVol  3,836M
Total DnVol  1,615M
52wk Highs 1118
52wk Lows    11
TRIN       0.81
NAZTRIN    0.72
PUT/CALL   0.65

Resistance Targets Hit

It was not pretty but after a day of strong volume and numerous
direction changes the indexes edged up at the end of the day to
close exactly at those very strong resistance levels I have
been discussing for the last three weeks. The Dow was the only
laggard with a close at 10592 missing my 10600 resistance target
by -8 points. The Nasdaq closed exactly on the 2100 level and
the Wilshire 5000 closed +8 points over my 11000 target. Friday
should be a very exciting day.

Dow Chart - Weekly

Nasdaq Chart Weekly

Economically the day was a draw with the real fireworks held
for Friday's open with the December Jobs Report. The Jobless
Claims today came in at 353,000 and slightly over the consensus
of 350,000. No brain damage there as 350K is the average for
the last four weeks. This inline report was actually an upside
surprise as the whisper number was for a lot more. This is the
first post holiday week, although still a partial, and analysts
thought it possible for a surge to appear. Next week is the
real number with no holidays to skew the figures. Continuing
claims continue to fall and this is pumping up expectations
for the Jobs Report on Friday. A drop in Jobless Claims means
layoffs are slowing but a drop in continuing claims means there
are people either finding work or dropping out of the system
as their claim periods expire. Analysts are hoping it is due
to hiring.

The Wholesale Trade numbers rose slightly in November with
Sales up +0.3% and Inventories up +0.5%. This was the lowest
sales increase in three months and well below the +2.0% gain
in October. Inventories remained the same at the +0.5% level.
The inventory to sales ratio remained a its historic low of
1.18 for the second consecutive month. While the rate of
growth has slowed it was still positive and continues to
predict a rapid inventory rebuild cycle ahead.

Consumer Credit fell to $4B in November from $8.3B in Oct
and $11.3B in September. Normally this would be a negative
occurrence but October was revised up to $8.3B from only
$900 million. Talk about a missed estimate there! The gain
was almost exclusively in the non revolving component from
strong auto purchases. Credit card debt fell for the first
time since June. Looks like consumers were getting ready
for the shopping season by making space on their cards.

Retail Sales rose +4.2% in December according to the ICSC
survey. Drug stores and Wholesale Clubs sported the biggest
gains at +8.0% for each component. There were some real
discrepancies to this in the news today. Major chains warned
that sales were weak and earnings would suffer while others
raised earnings guidance. It was a very confusing sector.
Kohls (KSS) warned and dropped -$3.70 to 41.80 after cutting
estimates to 69 cents from prior expectations in the 92 cent
range. KSS said same store sales FELL -1.2% for the last
five weeks. They aggressively managed inventory and slashed
prices to give away merchandise rather than carry it over
into January. Competitors claimed they "bought" the business
by selling so cheaply.

Other retailers warning were TAL, ANF, GPS and WMT. Retailers
raising guidance were ANN, BBY, PSUN and HOTT. Wal-Mart said
same store sales rose +4.3% as a surge in late holiday traffic
saved them from a dismal month. However they warned that
earnings would come in at the low end of their previously
forecasted range. Despite the weaker than expected performance
WMT still sold $33.66 billion for the five weeks ended Jan-2nd.
Pretty amazing volume and their one month revenue is more than
most retailers sell all year. Hard to grow in double digits
when the numbers are already so large. Still despite the
various warnings and misses 74% of retailers hit their Dec

Another warning came from Ryland Group that cratered the
entire homebuilding sector. RYL said it was disappointed in
its fourth quarter sales due to new orders declining for the
period. While earnings are still expected to be at record
levels it was not a major blow for the company but any sales
weakness in new homes produces fear in the sector. RYL is
still predicting earnings of $9.50 for 2004. (PE 7.7) They
ended the year with an order backlog of 5,841 units worth
$1.4 billion in sales. You would have thought they declared
bankruptcy from the hit to the stock. RYL dropped -$10 on
the news to $72.91. KBH fell -2.83, CTX -5.42, HOV -3.90.

The transportation sector took a hit after JBLU was cut by
JP Morgan saying it no longer believes the carrier can gain
in 2004 due to increased competition and lower traffic than
previously expected. With falling seat traffic and increased
competition the airline sector is facing an all out price
war to attract flyers. The code orange alert and the constant
cancellation of flights due to security concerns is going to
slow any recovery. American Airlines is going head to head
with JBLU by offering a free trip promotion in areas served
by both carriers.

The telecommunication sector got another boost on Thursday
from Nokia after they raised their estimates for the quarter.
The sector was hot after Nortel soared earlier in the week
on news of a new network build out contract. Even Lucent
soared from $2.85 to nearly $4.00 on the positive sector
news. LU and NT alone have accounted for more than 20% of
the NYSE volume over the last two days with combined volume
of more than 400 million shares on Thursday.

IBM was a focus of the day and traded up only slightly at
$93 after new rumors surfaced that they would miss their
revenue estimates. IBM has failed to take part in the rally
over the last month on earnings fears. After the close IBM
announced that the SEC had issued a Wells notice to IBM and
was ready to recommend action for securities fraud in the
handling of its relationship with Dollar General. IBM paid
$11 million for some equipment that was replaced at DG and
the accounting for that purchase and sale placed DG in a
favorable position. The SEC alleges that IBM aided DG in
a fraudulent transaction to pump up DG's books.

HPQ was back in the news with the Nasdaq claiming they were
going to be the first NYSE company to double list on both
exchanges. Carly Fiorina declined to comment in an on air
interview but the floor of the NYSE was a hotbed of concern
all day. Analysts feel that any material movement to "list"
on the Nasdaq could divert order flow from the NYSE and
limit the usefulness of the market makers thereby jeopardizing
the current specialist system. Others dismissed the Nasdaq
claim saying that most NYSE stocks were already traded
electronically on ICNs with no material volume drain.

UBS raised their 12 month S&P target to 1200 from 1150 on
expectations for better earnings in 2004. With markets at
two year highs that is a gutsy call but then 1200 is not
much higher than we are now. The S&P closed at 1130 and
well below strong resistance at 1160-1175. If we do see
some profit taking soon there are several estimates (not
mine) that any dip will see 1000-1010. That would put the
1200 UBS estimate +20% off the lows. Without that dip the
1200 target would only be a +6% gain for the year. Currently
more than 90% of the S&P are trading over their 200 dma.
You have to go back to 1983 for the last time this happened.

The indexes closed right at very strong resistance and
right in front of the December Jobs report. Talk about
asking for trouble. The consensus estimate for jobs is now
+127,000. The whisper number last week was for something in
the +50,000 range but in less than a week that has changed
significantly. I am hearing numbers as high as +250,000.
This bullishness has no basis in fact. It is simple hype
on top of hype but then considering the recent market action
it is right in line. Needless to say the good news is already
priced into the market. I went back to last year to see if
there were any trends to the hiring patterns. In Dec 2002
jobs lost dropped to -156,000 from November's loss of -81,000.
December was largest drop in 2002 since the -165K loss in
Feb-2002. You cannot compare 2001 because that was the
recession period. Also, comparing 2002 to 2003 is difficult
considering the strong rebound in the economy in the last
six months. Still some analysts are suggesting caution in
front of Friday's report. Obviously nobody is listening to

The Nasdaq edged up to touch 2100 after the close as the
final trades settled. This is very strong resistance as
2099 was the high for all of 2002. Moving over this level
should be hard but not impossible considering the already
extended conditions. The Nasdaq NDX Bullish Percent is back
to 80 and the level where it has paused for the last six
months of 2003.

Nasdaq Weekly Chart

Nasdaq 100 Bullish Percent

Nasdaq 100 Bullish Percent PNF

I am not suggesting the Nasdaq cannot move up from here but it
will be defying gravity and some very strong resistance to do
so. The Dow did not reach its key resistance level at 10600 but
came very close ending at 10592. The index broke out over the
down trend line from Jan-2000 currently a 10550 and pulled
within 8 points of 10600. The resistance band from 10600 to
10650 represents the highs from late 2001 and all of 2002. This
is very strong resistance considering the current extended

Dow Weekly Chart

DJIA Bullish Percent

DJIA Bullish Percent PNF

While the Dow and Nasdaq are the most followed indexes the
broadest market indicator is the Wilshire 5000, $TMW.X or
$WLSH depending on your chart service. This index succeeded
in touching the key 11000 level intraday and then edged over
that level after the close when market on close orders were
settled. First, this is very bullish if it can continue its
upward progress. It is at the top of its uptrend resistance
as well as its horizontal resistance and a breakout here could
attract even more buyers. The 11000 level was the high for all
of 2002. Are you seeing a common theme here? Dow, Compx and
Wilshire are all at 2002 resistance highs.

Wilshire 5000 Weekly

Here comes the hard part. Back in mid December I predicted the
Wilshire would hit 11000 the first week in January. That happened
on Thursday and that brought us to a critical point in the markets.

You know I have been suggesting the highs for January would be
made this week. So far so good. Now we are at that critical point
and those resistance highs will either hold or they will be broken.
If they hold then normal historical trends would still be in play.
If they are broken with the indexes at this already extended level
it would be very bullish. I am not the only one expecting a buying
opportunity in January. If we move up from here it could mean that
buying opportunity is not going to appear and those waiting on the
sidelines could begin rushing in to chase prices even higher.
Those who have been shorting this rising resistance all week will
be squeezed even harder and this already extended market could
take off like a rocket.

While I personally do not expect a strong gain from here there
are those who feel the market is just getting its second wind.
Volatility has collapsed with the VXO setting a new multi year
low of 14.42 and showing a complete lack of fear in the market.
The bullish percent on the NDX is 80% and 86% on the Dow. Traders
point to the rapidly increasing volume on the NYSE as proof that
the rally is real. Let me quickly point out that 500 million
shares on Wednesday and 400 million shares today have been in
Lucent and Nortel alone. Take 500 million off the totals for
both days and you still have strong volume but far from

Still while almost every indicator is grossly oversold the
buyers just keep coming. The internals are extremely positive
with 1131 new 52-week highs on Thursday. Only one day this week
has been under 1000 new highs and even at 814 it was still

So how do we rationalize this situation? We are at very strong
resistance but the market does not seem to care. Resistance
levels have been failing for weeks. Even key resistance has
buckled. Does that mean this resistance will as well? Nobody
knows but the answer is clear. The bulls are stampeding and
nothing is stopping them. Even the cautious TV commentators
that were suggesting restraint just last week are now tripping
over their tongues to praise the market internals. It seems
the world has converted to a buy only mentality and until
something happens to shock everyone back to reality the sky
is the limit.

What is it going to take to break the spell? With estimates
for market gains for 2004 at +10% to +12% we are already up
+5% in the first five days. What is left? Are we going to
spend the next 355 days covering that 5-7% left or raise the
targets? We all know, whether we want to admit it or not, that
this cannot go on forever. Eventually something will happen to
break the spell and return us to normal market conditions with
alternating up and down cycles. On Friday the Jobs Report is
officially expected to show +127,000 new jobs. The whisper
numbers are up to +250,000. What if we only grew +50,000 jobs?
That is probably not drastic enough to matter. What if we lost
jobs? Does the market care.

I think that is the key. The market did not care that Gateway
warned or Wal-Mart sales are slowing. It did not care that RYL
sold fewer homes or the ISM Services index fell. Remember the
bubble? Nobody cared about the fundamentals. Buy stocks they
are going up. Once the Dow closed over 10,000 in mid December
Pandora's box was opened and the investing fever was loosed
again. If the Dow is over 10,000 the market must be ok. Buy
stocks. Those that did not buy in December are chasing prices
in January. I do not know where it is going to end but every
feeding frenzy always ends. I can't in good conscience tell
you to go long. That decision is up to you. I can only suggest
that if you do go long you take out enough insurance to protect
yourself. Fortunately with volatility at multiyear lows that
put insurance is very cheap.

I had a vision today, more of a flashback of a video clip
they run on CNBC periodically. You know the one where they
show the running of the bulls in Spain. Those in front of
the herd are running for their lives and having a great time.
Those unable to stay ahead or slipping on the cobblestones
get trampled or gored. There are always a greater majority
safely on the sidelines watching as the scene plays out.
Tonight I am short at Wilshire 11000. If the herd runs by
me I will become a watcher from the safety of the sidelines.
I refuse to chase after the herd because I do not want to
meet it head on when it changes direction.

Enter Passively, Exit Aggressively.

Jim Brown


Dollar Dives, Equities Rise
Jonathan Levinson

Nothing much changed today, as the dollar sold off sharply,
equities rose to new highs, volatility collapsed, and gold and
the CRB advanced.  Silver declined, while treasuries treaded
water following steep gains during recent sessions.

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 ECB's decision not to cut rates resulted in a terrible day
for the US Dollar Index, with a more than 1% loss suffered in a
matter of hours.  Euro and swiss franc futures were up over 1%
for most of the session, while gold added just over 8 bps and
silver traded both sides of unchanged.  The CRB added 1.07 to
close at 266.23, led by copper, natural gas, heating oil, cotton,
and platinum futures.  Crude oil added 1.13% to close at 34, HUI
rose .68% to close at 244.03 and XAU add .62% to close at 108.97.

Daily chart of February gold

Gold rose against the dollar decline, but so did foreign
currencies, and other than in US Dollar terms, gold moved mostly
sideways.  In US Dollars, however, gold held the 420 level and
touched a high of 425.90, trading above 424 for most of the
session.    Next resistance is at 427.50, support at 420, 416 and
412.  The daily cycle oscillators continue to waver deep in
overbought territory, very extended but with price still
respecting the uptrend.  Tuesday's record volume session remains
the high for the move, and gold bugs want to see rising support
at 420 hold.

Daily chart of the ten year note yield

Treasuries traded mixed today, with the TNX adding all of 0.3
basis points to close at 4.249% after trading both sides of
unchanged throughout the session.  The slight correction of
yesterday's decline in the yield did not prevent the daily cycle
oscillators from extending their rollover, and any buying in
bonds tomorrow should complete the signal, kicking off the next
downphase in the TNX. A print at 4.2% will confirm the break of
rising pennant support.

Daily NQ candles

The NQ went out at the highs of the day and a new rally high,
rising by .89% to close at 1530.50, breaking the upper rising
channel trendline at the close.  The VXN set a new record low at
21.31, closing lower by 1% at 21.69, while the QQV went out at
19.79, -.3% for a new alltime closing low.  Extended continues to
grow more extended on the daily cycle oscillators, and the
current steeply rising channel has not seen any noteworthy
selling since the week of Dec 15.  Bull, bear, neutral or biased,
the absence of correction is becoming eerie.  Nasdaq volume was
very strong at better than 2.7B shares, and until the rising
channel breaks to the downside, this is clearly the bulls' show.

30 minute 20 day chart of the NQ

The 30 minute chart of the NQ shows yet another failed 30 minute
cycle downphase, as both price and oscillators extend their trend
of higher lows.  Trendline support has risen to 1525, and it's
worth reiterating that a trend is a trend until broken.
Volatility on the Nasdaq and NDX has reached levels never before
seen, and I continue to smell a sharp, extended, violent
correction around every dip.  But until even the most casual
glance at the chart fails to reveal a steep uptrend, top picking
remains countertrend and dangerous.

The blowoff this morning was very tempting, and scalp shorts were
successful if they were applied at or near the top.  Again, tight
stops, impeccable timing, patience and intestinal fortitude are
prerequisites.  The dip buy at the trendline, with the same
prereqs, would have also worked.  Tomorrow's employment report
will be key, and could well provoke yet another blowoff top.  I'm
simply unable to believe that the trend will run to the upside
forever, but there's simply no way to know.  My understanding of
rallies has always been that retail investors are the last to
commit, usually lured by tales of riches and headlines in the
non-financial media.  The strength in small and OTC stocks smacks
of this speculative frenzy.  Will it correct tomorrow, or in
days, weeks or months?  Volume is very strong.  The more
conservative, safer route is to wait for the daily rising channel
to fail with a close below 1500, and follow the line higher.
Picking tops is the most aggressive speculation, fine for
gunslingers.  The low volatility and narrow ranges are trying to
squeeze out those traders who fall into neither camp.

Daily ES candles

The ES rose +.38% or 4.25 to close at 1129.75, peeking above the
upper rising channel trendline on a bullish hammer print.  GE
broke solidly above 32, doing its best to break the right
shoulder daily head and shoulders formation that so many have
been following.  NYSE volume was strong at 1.8B.  Unlike on the
NQ, which has been climbing since mid-December, the current
channel on the ES dates to mid-November.  The VXO closed at
14.46, down another 2.63% to a new multiyear low, verging on a
full decade.  The daily cycle oscillators continue to trend
higher, and price trendline support has risen to 1120, with the
bottom of the channel now at 1107.  Again, a spike high followed
by a bearish engulfing plunge is my most likely scenario, but it
is overdue, and timing is everything.

20 day 30 minute chart of the ES

The 30 minute cycle upphase rolled over following the opening
spike high, and the first sign of trouble for bears was the lack
of price traction on the downphase.  The rising trendline was
never tested, and the bounce, weak and hesitant at first, morphed
into another squeeze going into the close, turning the 30 min
oscillators back up from a higher oscillator low.  This is
classic trending action, and short of scalping relative highs,
there's nothing to do but to wait for the tide to turn.

150-tick ES

Once again, the ES gave traders very little with which to work,
trading a relentlessly narrow range at the rally highs as
volatility collapsed to new lows.  A short cycle downphase is due
to commence immediately, with ES trading lightly negative as of
this writing.

Daily YM candles

The YM added +.50% or 53 points to close at 10564.  It would have
been a perfect gravestone doji but for the fact that it was a
positive close.  The 10 day stochastic is history, maxxed out at
the top of its range, but the Macd converged slightly, the first
bearish hint from that indicator in many sessions.  10400 is the
new rising channel support, above which the trend remains

20 day 30 minute chart of the YM

The YM looks weaker than its peers on the 30 minute charts, with
a flatter rising oscillator trend.  The ball is still under
bullish control, but with volatility so low and the range so
narrow, the drop could be sharp and strong.

Equities had been advancing on a falling dollar, and yesterday
saw the dollar bounce with equities holding firm.  They rose
again on today's dollar drop.  News of BoJ intervention was on
the wires today, and if the BoJ, the Fed or its dealers acting in
whatever capacity are buying equities, then we have to remain on
guard, as if we weren't already, for unexpected moves in either


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Indices finish higher on valuation concerns

The major indices pushed to new 52-week highs after Nokia
(NYSE:NOK) $20.47 +13.9% upwardly revised its fourth-quarter
earnings outlook, while shares of Sun Microsystems (NASDAQ:SUNW)
$5.51 +10.42% lead a broad list of NASDAQ gainers after Banc of
America Securities upgraded the stock to "buy" with a price
target of $6.25 on the belief SUNW is a leveraged play on
improving enterprise spending in 2004, and that valuation is
reasonable at 1.1-times sales.

UBS revised its 12-month target for the S&P 500 Index (SPX.X)
1,131.92 +0.49% to 1,200 from 1,150 due to greater confidence in
an economic expansion, and to reflect a higher 2004 earnings

A quick calculation on my part would have UBS saying there may be
an additional 6.01% upside from current levels for this year.
Since the SPX has exceeded its bullish vertical count of 1,105, a
quick check of the narrower S&P 100 Index (OEX.X) 562.88 +0.63%
shows its current bullish vertical count at 595.  Considering a
potential 2004 trade at 595 from current levels would equate to a
5.7% gain, it may be that UBS's fundamental analysis is worth

Networkers ($NWX.X) 292.43 +6.04%, Combined Telecom (IXTCX)
197.74 +2.48%, Semiconductor (SOX.X) 545.01 +3.39% and Disk
Drives (DDX.X) 143.38 +2.86% all moved higher.  Airlines ($XAL.X)
65.12 -2.34% were notable decliners after JetBlue Airways
(NASDAQ:JBLU) $25.67 -11.23% and Frontier Airlines (NASDAQ:FRNT)
$12.00 -18% fell on mixed December traffic reports.

The Dow Jones Home Construction Index (DJUSHB) 543.99 -4.45% was
today's sector loser as homebuilders saw selling, with backlog
concerns being cited.  A quick look at Stockcharts.com's $DJUSHB
point and figure chart does show this index having triggered a
spread-triple bottom sell signal at 550.00 on January 5th, and an
alert to weakness.  A quick check of my $DJUSHB bar chart with 2
fitted retracement shown in prior Index Trader Wraps has today's
lows entering an important near-term zone of support and base of
bullish regression channel.  A break much below the 525 level
could have this index vulnerable to 482 and June highs.

Dow Jones Home Construction Index ($DJUSHB) - Daily Intervals

Homebuilder Index (DJUSHB) traded base of a bullish regression
channel taken from March lows.  First sign of weakness on the
above chart would be trade below 525, where DJUSHB becomes
vulnerable to 482.00.  The point and figure chart's bullish
support trend currently resides at 445.

Market Snapshot / Internals - 01/08/04 Close

Volume levels continue to build Lucent (NYSE:LU) $3.88 +10.54%
and Nortel (NYSE:NT) $6.13 +7.92% were the most actively traded
stocks traded in today's market and turned 254.8 million and
156.7 million shares respectively and most likely boosted total
NYSE volume rates to its highest level since I started keeping
daily tabulations on May 2, 2003, when this impressive bull
market had just gotten underway.

Pivot Matrix Analysis -

The S&P Banks (BIX.X) 338.35 -0.19% found important support at
the 337 level again today, and today's fractional losses may have
kept the SPX/OEX firm enough to get a test and close above
correlative WEEKLY R2 and MONTHLY R1, which based on the pivot
matrix, could have the MONTHLY R2's in play as a next level
higher.  Still, I think the SPX/OEX needs this group, along with
other financials to get that type of impressive move higher, and
the trigger point may be the BIX.X back above its WEEKLY Pivot.

Swing trade bulls in my QQQ trade will note DAILY R2 and MONTHLY
R2 of $38.26 and MONTHLY R2 $38.25.  This is our swing trade
target and I'm looking to take gains there if traded.  To protect
gains from bullish re-entry of $34.41, I'm moving stop higher to
$37.70, but should we see the QQQ slowly edge higher toward
target, I will most likely start moving stop higher.  QQQ is
$38.00 in after-hours, which gives an additional $0.25 upside to
target.  Doesn't make sense to risk much more than that right
now, but I think bears will be willing to pay the piper at

NASDAQ-100 Tracking Stock (AMEX:QQQ) - 5-minute intervals

Santa Claus has been very good to traders in the New Year and it
may be destiny calling the QQQ to our current bullish target of
$38.25.  I noted a BIG volume spike intra-day, that came out of
nowhere, and following action has me thinking there was some type
of "eagerness" to buy the QQQ there, which I do think was shorted
to the market, which had to be bought back by the close, thus the
"reason" the Q's continued to trade higher lows and close right
at the high.  We'll find out tomorrow, but a stop just below
DAILY S1 should protect bulls.

S&P 500 Index Chart - Daily Intervals

The SPX just keeps getting more extended, but its been bulls
profiting and bears losing.  Bulls shouldn't be complacent, but
I'd look for a bullish trade to unfold on a break above 1,132.00,
for what could be an impressive display of short covering.
Protect it with a stop below 1,129.

Dow Industrials (INDU) Chart - Daily Intervals

INDU trying to break above the bullish wedge.  The INDU traded
similar this summer, but came back into channel as it built a
sideways base for about 3-months.  Similar trade might have INDU
trading 10,682 near-term, where bulls can protect with a stop at

Again... resistance levels can be broken, especially when
stocks/indices trade yearly highs were supply of stock is
limited, but in what looks to be a slightly extended market, can
still trade bullish, just trail with stops.

Jeff Bailey


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Will Investors Sell The News?
- J. Brown

Thursday was a banner day for the U.S. stock markets.  A better
than expected earnings report from Taiwan Semiconductor (TSM) and
a very strong earnings report from mobile-phone maker Nokia (NOK)
helped set the mood.  The strong profit and revenue numbers from
these tech companies was enough for investors to ignore the worse
than expect initial jobless claims.  Economists had been
expecting a small rise but instead received an increase of 14,000
to 353,000 initial claims.  This number wasn't totally out of the
ballpark and the markets shrugged it off.

Today was all about tech and telecom stocks extending their lead
and the markets trying to follow.  Overseas investment firm UBS
got into the act by raising their 12-month target on the S&P 500
to 1200 from 1150.  Overall the market internals were strongly
bullish.  The NYSE saw 17 winners for every 11 losers.  The
NASDAQ's advance decline ratio came in at 19 to 11.  New highs
totaled 684 to just 8 new lows.  Up volume overwhelmed down
volume 17 to 7 on the NYSE and 18 to 8 on the NASDAQ.

Yes, it was a pretty strong day the bulls and Dow component Alcoa
(AA) opened earnings season after tonight's closing bell by
beating the estimates by 5 cents with a net income of 39 cents a
share.  However, the major indices continue to look very extended
and tomorrow's December jobs report would be the perfect excuse
to sell the news, especially if the results are merely inline.
Heaven forbid should the number disappoint.  Current estimates
are for an increase of 150,000 new jobs in December, up from
57,000 in November.  On a side note news that that IBM has
received a "Wells Notice" from the SEC could influence investor
sentiment.  A Wells notice means the SEC is considering civil
action against the company for securities law violations.

Trade carefully and protect your profits!


Market Averages


52-week High: 10592
52-week Low :  7416
Current     : 10592

Moving Averages:

 10-dma: 10457
 50-dma:  9998
200-dma:  9294

S&P 500 ($SPX)

52-week High: 1131
52-week Low :  788
Current     : 1131

Moving Averages:

 10-dma: 1113
 50-dma: 1069
200-dma:  997

Nasdaq-100 ($NDX)

52-week High: 1530
52-week Low :  795
Current     : 1530

Moving Averages:

 10-dma: 1480
 50-dma: 1428
200-dma: 1285


Holy Cow, Batman!  The volatility in the markets has crashed as
the VXO has fallen from over 18 to close under 15 for the first
time in years.  The VXN has fallen to another all-time low.
Bears are probably groaning as readings this low "normally"
suggest a market top, but then the market has not been very
normal for months.  These volatility indices remain signals of
caution for anyone willing to listen.

CBOE Market Volatility Index (VIX) =  15.61 +0.11
CBOE Mkt Volatility old VIX  (VXO) =  14.46 -0.39
Nasdaq Volatility Index (VXN)      =  21.89 -0.02


          Put/Call Ratio  Call Volume   Put Volume

Total          0.65      1,160,572       753,665
Equity Only    0.52        970,355       500,507
OEX            1.00         36,216        36,247
QQQ            4.38         23,541       103,143


Bullish Percent Data

           Current   Change   Status
NYSE          77.7    + 1     Bull Confirmed
NASDAQ-100    80.0    + 1     Bull Confirmed
Dow Indust.   86.7    + 0     Bull Confirmed
S&P 500       86.8    + 1     Bull Confirmed
S&P 100       85.0    + 1     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: 0.86
10-dma: 0.87
21-dma: 0.92
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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1726      1925
Decliners    1113      1180

New Highs     364       320
New Lows        8         0

Up Volume   1746M     1806M
Down Vol.    727M      821M

Total Vol.  1486M     2648M
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


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


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                 Thursday 01-08-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

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


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.




Best Buy Company - BBY - close: 53.72 change: +1.51 stop: 53.50

Proving once again that they are eating CC's lunch, BBY reported
a 9.3% increase to same store sales this morning and that was all
the bulls needed to drive the stock through our $53.50 stop.  The
writing was on the wall yesterday with the stock's rally through
the 20-dma, which had been providing resistance and today's
strong rally closed the book on this bearish play.  Any open
positions should have been stopped out at the open today and
traders reluctant to exit the play on that early burst higher
should now be looking to exit on any early weakness tomorrow.
This play never worked in our favor, and traders that waited for
confirmed weakness in the form of a breakdown avoided the loss

Picked on January 4th at     $50.82
Change since picked:          +2.90
Earnings Date               3/17/04 (unconfirmed)
Average Daily Volume =     4.16 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

Live Broker and Online Trading Available     888-281-9569




Quest Diagnostic - DGX - close: 73.03 chg: -0.60 stop: 69.00

We don't mean to be a broken record here but there continues to be
little news and at this point little movement in shares of DGX.
The stock is drifting higher with a trend of higher lows and the
P&F chart is bullish but buyers are taking their time.  Looking
closer at today's candle we might expect more of a dip tomorrow
with minor support at $72.  The next hurdle is the early December
highs at $75.

Picked on December 30 at $72.95
Change since picked:     + 0.08
Earnings Date          01/22/03 (unconfirmed)
Average Daily Volume:      836  thousand
Chart =


Deluxe Corp. - DLX - close: 42.52 change: +0.29 stop: 40.50

It hasn't given what could be called an exciting performance so
far, but at least our DLX play has started out in the right
direction.  We're playing for follow-through from Tuesday's
strong breakout over the $41.80 level and so far we really
haven't seen it.  That said, we have had a couple of intraday
dips near $42, which could have been used for entry into the
play.  DLX doesn't tend to move rapidly, but it does have a habit
of trending well once it gets moving.  Right now, the bulls are
trying to work through overhead supply near the 200-dma ($42.83),
but once over that level, we can look for a move up to the $44
resistance level.  Maintain stops at $40.50 and take advantage of
rebounds from the site of the broken H&S neckline ($41.80) as an
attractive entry point.

Picked on January 6th at     $42.30
Change since picked:          +0.22
Earnings Date                   N/A
Average Daily Volume =        336 K


General Dynamics - GD - close: 92.54 chg: +1.54 stop: 87.75 *new*

We're seeing a second day to the fresh rally in shares of GD.  The
same can be said for the DFI defense index.  What's driving the
move still remains a mystery but volume has been stronger than
average.  GD really doesn't have much resistance between $91 and
$96 and we could see a smooth run higher.  Should a pull back
occur then traders can look for $91-90 as new support and a
potential entry point.  We are going to raise our stop loss to

Picked on December 21 at $88.78
Change since picked:     + 3.76
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:       1.0  million
Chart =


Gilead Sciences - GILD - cls: 61.34 chng: -1.00 stop: 57.75*new*

As expected, the recent trading pattern in shares of GILD was a
holding pattern, while investors waited for that next catalyst.
Well, it arrived with a bang yesterday with bullish comments out
from Merrill Lynch, citing "strong sustainable growth and upside
to estimates".  That seems to have been what the buyers were
waiting for, as the stock broke out of its malaise, shooting
through the top of its neutral wedge to close at its high of the
day.  An early attempt at bullish continuation this morning ran
into trouble just over $62.50 though and GILD drifted lower
throughout the session to end with a 1.6% loss.  This places the
stock just above $61, which had previously served as resistance
and we'll now need to see this level act as support.  Obviously,
the best entries have now passed by, with the breakout from the
wedge pattern.  Consider adding to existing positions on a
successful rebound from the top of the wedge near $60.  With next
resistance up near $63.75, we aren't advocating fresh breakout
entries at this time.  Conservative traders can consider
harvesting some gains near $64, although we'll officially be
holding out for a run at the top of the September gap near $66.
Raise stops to $57.75, just under yesterday's intraday low.

Picked on December 21st at   $59.40
Change since picked:          +1.94
Earnings Date               1/29/04 (unconfirmed)
Average Daily Volume =     3.67 mln


Maxim Integrated - MXIM - cls: 54.32 chg: +1.17 stop: 51.00 *new*

The SOX semiconductor index has pushed its way to a new one-year
high.  Actually, it has hit levels not seen since May 2002. It
looks like the SOX could run from its current position at 545 to
the 560 level before hitting resistance.  Meanwhile MXIM is
really enjoying the strength in the chip sector.  The stock is up
four days in a row with the last three sessions exceptionally
strong on rising volume.  We know that MXIM can't keep this pace
up for very long and we will eventually see a pull back.
However, shares should have new support at 52.50 and that may be
the next entry point.  The next major resistance is the $57.50-
58.00 levels.  We're going to raise our stop loss to 51.00.

Picked on January 06 at $51.89
Change since picked:    + 2.43
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =


UTStarcom Inc - UTSI - close: 41.34 change: +0.15 stop: 37.85

After two days of trading sideways we're about to see some action
in shares of UTSI.  This morning the stock got some positive news
from First Albany who reiterated their "buy" rating on the stock.
Yet the real news happened after the bell.  In a single press
release UTSI announced that it was raising its Q4 guidance from
49 to 50 cents a share to 50-51 cents a share.  They also raised
their revenue guidance from $630-640 million to $640-645 million.
Unfortunately, this merely matches current consensus estimates of
51 cents and $644 million by analysts.  The second bit of news is
that the company will sell 12.1 million shares of stock to Bank
of America.  The post-market press release sent shares of UTSI
lower on Instinet and the stock could open at $40.00 tomorrow.
The question for us is whether or not this will be an entry
point.  If UTSI pulls back to $40 and bounces, then great.
However, if shares trade under $40 we'd be very cautious even
though the $39 level should act as support.

Picked on January 06 at $40.71
Change since picked:    + 0.63
Earnings Date         01/22/03 (confirmed)
Average Daily Volume:      3.0 million
Chart =


Yahoo! - YHOO - close: 48.58 change: +0.91 stop: 44.50 *new*

The new year has certainly been a good one for YHOO thus far.
YHOO ended 2003 at $45 and it's been straight up ever since.
This week alone the company has announced plans to tackle
Google's dominance in the search-engine industry and today YHOO
announced a partnership with electronics maker Phillips to
provide content for the next generation of wireless networking
electronics (one of the lead products is an Internet ready TV).
Remember that our initial profit target was the $50 level and
YHOO is getting close.  Short-term traders can already plan their
escape.  However, should YHOO pull back we can look for minor
support near 47.00-47.50.  We're going to raise our stop loss to

Picked on December 24 at $45.01
Change since picked:     + 3.57
Earnings Date          01/14/03 (unconfirmed)
Average Daily Volume:      12.3 million
Chart =




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Whirlpool Corporation - WHR - cls: 72.78 chng: +0.55 stop: 73.50

If it weren't for the early news from JP Morgan, WHR would have
very likely had a different trading session on Thursday.  The
firm initiated coverage of the stock with an Outperform rating
and that sent the stock soaring right to strong resistance near
$73.  Fortunately, that was all the fuel the bulls could muster
and WHR drifted lower throughout the remainder of the day.
Remember our premise for the play that weakness in the Housing
sector should translate to weakness in WHR as fewer homes being
built and purchased should result in fewer appliances being
purchased.  So it is a bit perplexing that the stock didn't
exhibit more weakness in the wake of the major earnings warning
from RYL today, that sent the housing sector reeling to a 4.45%
loss.  Only the most aggressive traders should attempt entries up
here at resistance and those positions must be protected with a
firm stop at $73.50.  The more prudent approach to new entries
will be to wait for a drop below $70.75 (the bottom of the past
couple weeks trading range) before playing.

Picked on January 4th at      $71.18
Change since picked:           +1.60
Earnings Date                2/03/04 (confirmed)
Average Daily Volume =         586 K


Countrywide Financial - CFC - cls: 70.95 chng: -2.05 stop: 75.00

Company Description:
Countrywide Financial Corporation is a holding company that,
through its subsidiaries, is engaged primarily in the residential
mortgage banking business, as well as in other financial services
that are in large part related to the residential mortgage
market.  Primarily through its principal subsidiary, Countrywide
Home Loans, Inc. (CHL), Countrywide is engaged in the residential
mortgage banking business, which entails the origination,
purchase, sale and servicing of residential mortgage loans.  The
company offers property and casualty insurance, as well as life
and disability insurance, both as an underwriter and as an
independent agent. Through its banking segment, it operates a
nationally chartered bank that primarily invests in residential
mortgage loans and prime home equity lines of credit sourced
through its mortgage banking operation.

Why we like it:
Following the meteoric rise of the Housing stocks in recent
months, CFC broke out form its consolidation pattern near $55 in
September and launched all the way up to the high side of $80 be
early December.  Since then however, the stock has been weakening
and has been looking like a potential bearish trade candidate.
The first technical sign of weakness was the simultaneous drop
through the 10-dma ($74.62) and 50-dma ($76.76) on 12/23.  Since
then the 50-dma has not been retested and the 10-dma has crossed
below the 50-dma, providing consistent intraday resistance for
close to 3 weeks.  Up until today, the $72.50 level looked like
it should provide solid support for the stock, but the meltdown
in the Housing sector appears to have changed the landscape
significantly.  RYL issued a severe warning this morning, leading
the stock to lose more than 12% and pressuring the Home Building
sector ($DJUSHB) to a nearly 4.5% loss.  Due to its close ties
with the sector, if home buying demand truly is weakening, it
will likely have a pronounced negative effect on CFC.

Investors were wise to that reality today and handed the stock a
2.8% loss, producing a drop through that $72.50 resistance and an
intraday foray (quick as it was) below $70.  This is critical
support and if it breaks, we can look for a significant drop in
the stock.  Below $70, there's really no meaningful support until
$65, and realistically, it looks like a drop to the $60 level
could be in the cards.  That would likely define the bottom of
any downside action though, as the 200-dma ($59.43) is likely to
lend support.  The PnF chart gives bearish confirmation as well
with today's Triple Bottom Sell signal and a tentative bearish
price target of $61.  We'll use a trigger of $69.70, which is
below today's intraday low ($69.73).  When that level breaks,
momentum entries on the initial break will make the most sense.
Traders hoping to enter on a subsequent failed rebound can look
for a rollover in the $72-73 area as their opportunity.  Our
initial target will be $65, but we're really targeting the $60-61
area.  Initial stops will be set at $75, just above the 10-dma.

Suggested Options:
Aggressive short-term traders can use the February 65 Put, while
those with a more conservative approach will want to use the
February 70 put.  While we have listed a January option, with
expiration next week, it makes more sense to buy the extra time.
The February $70 strike is our preferred option.

! Alert - January options expire next week!

BUY PUT JAN-70 CFC-MN OI=1116 at $1.25 SL=0.60
BUY PUT FEB-70*CFC-NN OI=1834 at $3.50 SL=1.75
BUY PUT FEB-65 CFC-NM OI= 748 at $1.75 SL=0.75

Annotated Chart of CFC:

Picked on January 8th at      $70.95
Change since picked:           +0.00
Earnings Date                1/27/04 (confirmed)
Average Daily Volume =      1.80 mln


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The Option Investor Newsletter                 Thursday 01-08-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: SEE NOTE ***NEW FEATURE***
Watch List: Stocks for Friday
Traders Corner: While The Cat’s Away, They’re Trying To Steal Our
    Litter Box


OptionInvestor.com is constantly trying to adjust and tweak our
newsletters and website to provide the best possible product.  One
such improvement is the introduction of a daily watch list in
place of a daily "play of the day".  Instead of just one "play"
for tomorrow, we'll provide several trading ideas for your


Stocks for Friday

How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.

Eli Lilly & Co - LLY - close: 68.10 change: -1.72

WHAT TO WATCH:  The DRG drug index was one of today's under
performers despite the tech-lead rally.  Joining the DRG in its
decline was LLY.  The stock has broken its short-term three-month
rising channel and its simple 50-dma on better than average
volume.  The daily chart suggest that LLY is headed for a test of
its 200-dma near the $65.00 mark.  However, the weekly chart
shows an even older and wider rising channel for LLY.  If LLY
breaks $65 it could aim for the bottom of this larger channel
near $60.00.  Earnings are expected at the end of January.



Hewlett-Packard Co - HPQ - close: 24.69 change: +1.33

WHAT TO WATCH:  Carly Fiorina, HP's CEO, has been making the
financial media rounds the last couple of days while the tech
industry unveils its latest gadgets at the Las Vegas Consumer
Electronics Show.  Sounds like investors were happy to hear that
HPQ is teaming up with Apple to make their own ipod-like music
player because shares of HPQ surged 5.69% to break resistance at
$24.00.  The next level of significant resistance appears to be
the 27.50 level.  Interested traders may want to follow this one.



Chinadotcom - CHINA - close: 10.83 change: +1.38

WHAT TO WATCH:  This stock is a bit cheap to play options on but
it sure likes to move.  The stock has rebounded strongly off
support at $8.00 just a week ago to break resistance at $10.50
today.  Volume was very strong today at 15.1 million shares.
It's probably no coincidence that the recent lows in December
just happened to be the rising support on its P&F chart.
Aggressive traders, and I do mean aggressive, might want to watch
this for a potential entry point.  The next level of resistance
may be $13.00.



American Standard Cos - ASD - close: 102.61 change: +0.46

WHAT TO WATCH:  We have strongly considered adding ASD to the
call list several times over the last few days and today's
breakout and close over the $102 mark was tough to pass up.
Volume has been rising on the recent rally and technical
oscillators look bullish.  If ASD sees a dip the $100 mark might
be a good place to evaluate new entries.


RADAR SCREEN - more stocks to watch

JPM $38.67 +0.65 - It's interesting to note that after seven
months of consolidating sideways that shares of JPM are finally
on the move and hitting new highs.

JCOM $28.20 +1.07 - We'd watch JCOM for a breakout over the $30
level now that it has reclaimed its simple 50-dma.  Watch for
some resistance at $32.50.

TIF $42.00 -1.06 - High-end retailer TIF appears to be losing the
fight.  The company raises its Q4 estimates and shares still fall
2.4% on strong volume of 2.2 million shares.  If TIF breaks the
$40 level look for it to test the 200-dma near support at 37.50.

ADBE $38.00 -1.44 - Software maker ADBE is not enjoying the tech-
lead rally in the NASDAQ.  Quite the contrary, shares have been
falling in a pattern of lower highs for weeks.  Now the stock
threatens to break support at 37.50 and its 200-dma.  Should this
level break then traders might be able to ride it toward the
32.00 region.

PEG & AEG - Both electric utility stocks are at or near new highs
and both currently have a dividend yield of more than 4.5%.  As
investors thoughts begin to turn toward tax season there may be
more and more considering the current low dividend tax rates,
making PEG and AEG some tempting investments.


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While The Cat’s Away, They’re Trying To Steal Our Litter Box
By Mike Parnos, Investing With Attitude

Wouldn’t you know it?  I go away for a few days and the market
goes off its medication.   Who would have believed the NASDAQ
would be going almost straight up?  Not me.  It hasn’t even taken
a bathroom break.   When it does, it’s going to be a doozy!!

The bulls are loving it.  We, on the other hand, aren’t thrilled.
Why?  It’s simple.  We are doing the best to deal with a trending
market using essentially neutral strategies.  Even the crap
tables, sometimes people have a lucky streak.   Over time, they’ll
give it all back and the casino will build another addition with
their money.

At the bottom of every column I write that “mierde” happens and we
should be prepared.  Well, it hit the fan this month, but while
the mess may be distasteful, it’s certainly not as bad as it could
have been.  It looks like this month will be only the second month
in the last 15 that we’re going to experience a loss.  But, never
fear, it’s manageable – because we know when, and how, to get out
of positions gone astray.  Here are the adjustments we made this

NDX Iron Condor –
We had to close out the bear call spread of our Iron Condor when
the NDX plowed through our short January 1500 call.  We bought
back the 1500 call and waited to see if the NDX was going to
bounce back down.  But, apparently, the resistance wasn’t going to
hold and after the NDX continued up a bit, we sold the long call.
The bottom line is that we’re taking a loss.  It cost $4,750 to
close out the 1500/1525 bear call spread.  Since we originally
took in $3,050 in credit, our loss on this position was $1,700.
Aren’t we glad we only did five contracts?  I am.

SOX Iron Condor –
Since the market, especially the NASDAQ, was rising out of
control, it took the Semi-conductor index along with it.  So, we
had to close out SOX Iron Condor position with a loss.  It cost
$5,600 to close the bear call spread.  We had taken in $2,345.
Therefore, our loss was $3,255.

QQQ Diagonal Calendar Spread –
Our cheap calendar spread play got a little cheaper early this
week when we rolled out our position to February.  Remember, we
bought the March $34 puts and we’re selling against the position
as we wait for the market to pull back.  The rate the market is
going, I’m not holding my breath, but there’s not a lot on the
line.  We bought back the January $33 call for a nickel and rolled
out to the February $34 puts at $35.  Our credit was $.30 – which
reduced our cost to $.70.

QQQ ITM Strangle –
This is our ongoing play that is generating a nice cash flow.
With the market – and the QQQs – moving up, there is very little
time value left in our $34 calls and puts.  So, there was no point
in waiting the extra week because there was virtually no
additional time value to erode away.  We bought back the January
$34 calls and rolled out to the February $34 calls for a credit of
$.20.  We bought back the January $34 puts for a nickel and rolled
out to the February $36 puts for $.60 -- a net $.55 credit.  Our
total credit for the two rollouts was $.75.

If the QQQs continue up much further, it’s going to be time to re-
establish our position.  In other words, we’re going to have to
close out our LEAPS positions and establish a new range.  The
likely new range will be $34 on the bottom and $44 on the top.

In Sunday’s column, I’ll go over the procedure for this
adjustment.  Plus, I will hopefully have the QQQ Adjustment Sheet
available to send out to those who are interested.  There is a
specific order of trades that needs to be adhered to so that your
broker (and, of course, you) doesn’t go nuts and to avoid

I’ll Be Back . . .
I’m returning from my adventure very early Friday morning.  I will
begin to answer your email questions as soon as I can.   Thanks
for your patience.  I know it was a hectic week, but, if you’ve
been a dutiful reader of my column, you will have known how to
make the adjustments I discussed above.

It Isn’t All Bad
As of this writing, we still have two positions that have can end
up profitable.  Our OEX Credit Spread Boogie is almost a lock and
the XAU Iron Condor has a decent chance to make us money too.

Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor
We sold 5 NDX January 1500 calls and bought 5 NDX January 1525
calls for a credit of $3.70 (x 5 = $1,850).  Then we sold 5 NDX
January 1325 puts and bought 5 NDX January 1300 puts for a credit
of $2.40 (x 5 = $1,200). The total credit was $6.10.  Maximum
profit range: 1325 – 1500.  Potential profit: $3,050. (Closed –
see above article). Loss: $1,700

Position #2 – SOX (Semiconductor Index) – Iron Condor
We sold 10 SOX January 530 calls and bought 10 SOX January 540
calls for a credit of $1.40 (x 10 = $1,400).  Then we sold 7 SOX
January 440 puts and bought 7 SOX January 425 puts for a credit of
$1.35 (x 7 = $945).  Our total credit was $2,345.  Maximum profit
range: 440 – 530.  Potential profit: $2,345. (Closed – see above
article). Loss: $3,255.

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

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

QQQ ITM Strangle – Ongoing Long Term
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We're
going to make money by selling near term puts and calls every
month.  Here's what we've done so far:
October: Oct. $33 puts and Oct. $34 calls – credit of $1,900.
November: Nov. $34 puts and calls – credit of $1,150.
December: Dec. $34 puts and calls – credit of $1,500.
January: Jan. $34 puts and calls – credit of $850.

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

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

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

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

Mike Parnos
CPTI Master Strategist and HCP

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


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