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Daily Newsletter, Sunday, 01/11/2004

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The Option Investor Newsletter                   Sunday 01-11-2004
Copyright 2004, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bears Confused By Facts
Futures Market: Extremes
Index Trader Wrap: Correction
Editor's Plays: Finally Some Weakness
Market Sentiment: 1,000 Jobs
Ask the Analyst: The Trap!
Coming Events: Earnings, Splits, Economic Events


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       WE 01-09        WE 01-02        WE 12-26        WE 12-19
DOW    10458.89 + 49.04 10409.8 + 85.18 10324.6 + 46.45 +236.06
Nasdaq  2086.92 + 80.24 2006.68 + 33.54 1973.14 + 22.12 +  2.02
S&P-100  556.55 +  6.56  549.99 +  7.21  542.78 +  2.52 +  8.48
S&P-500 1121.86 + 13.38 1108.48 + 12.21 1096.27 +  7.61 + 14.52
W5000  10929.00 +151.14 10777.9 +115.48 10662.4 + 82.96 +114.94
RUT      575.20 + 14.35  560.85 +  5.75  555.10 +  8.22 -  0.71
TRAN    2988.94 - 19.22 3008.16 +  8.49 2999.67 + 12.24 +  4.02
VIX       16.75 -  1.47   18.22 +  0.83   17.39 +  0.97 +  0.01
VXO       15.94 -  2.00   17.94 +  1.36   16.58 +  0.53 +  0.10
VXN       23.01 -  1.50   24.51 +  0.56   23.95 -  0.94 -  0.97
TRIN       1.63            1.01            0.79            1.02
Put/Call   0.65            0.76            0.86            0.80
******************************************************************



Bears Confused By Facts
by Jim Brown

The Jobs Report on Friday confused the bears but failed to
sway the bulls. The terror threat level was lowered and a
doctor with an MBA was the first wannabe cut by Donald
Trump. The Martian Lander phoned home that it was locked
in its room and Bush is sending men to Mars to help out.
Pete Rose admitted he bet on baseball and Brittany Spears
is single again. The Nasdaq set a new two-year high. Sounds
like a normal week in the markets. Can't wait to see what
next week brings.

Dow Chart


Nasdaq Chart



There is no way to sugar coat it the Jobs Report was ugly
enough to stop a clock. Just a clock, not the stock market.
There was no good news unless you count the fact the headline
number was barely positive at +1000 jobs. I am betting it
gets revised down to negative next month. There were only
an additional 20 jobs created for each state for December.
The official consensus estimates were +127,000 to +150,000.
The whisper numbers were as high as +300,000. Sure looks
like a lot of analysts were on drugs when they did their
research.

The Jobs numbers were actually worse than it seems. The Nov
numbers were revised down to 43,000 from 57,000 and the Oct
numbers were revised to 100,000 from 137,000. The bottom
line was a drop in jobs of -51,000 over the prior 60 days
and almost zero job creation in December if the meager
+1000 stands. The unemployment rate fell to 5.7% but not
because people found jobs but because 309,000 workers gave
up looking during the month. Household employment also fell
-54,000 after big gains in November according to a different
jobs survey. Weak manufacturing payrolls continue to be the
burden. Levi Strauss closed its last American plant this
week completing a move of its entire manufacturing process
overseas. According to one analyst 630,000 apparel
manufacturing jobs are going to be moved overseas in 2004
based on known announcements. 1300 apparel plants in the
U.S. are scheduled to be closed. Over 170,000 workers in
India are now employed in call centers that were exclusively
U.S. jobs two years ago. Over 200,000 IT services jobs were
moved to India over the last twelve months. This is just the
tip of the iceberg. It is no surprise to many that the jobs
numbers remain weak.

The drop in jobs was the second monthly drop and with
historical trends suggesting January will be weak the odds
are good that string will stretch to three. Job creation
was also weak in the ISM Services report earlier in the
week and with services a leading indicator for manufacturing
that suggests we are in for some rough going. The
manufacturing work week fell to 40.7 hours and a further
drop will force GDP revisions for the 1Q and we have not
even seen the first estimate yet. Hours for the production
workweek fell to 33.7. Average hours worked fell to 98.8
in December. Used as a proxy for GDP this number for the
quarter only rose +2.18% suggesting the GDP will be lighter
than expected.

The Jobs report was the weakest report since July when the
economy lost -57,000 jobs. According to almost every real
economic analyst and the Fed the economy is not expected
to produce a sustained monthly pace of +150,000 jobs until
2005. Why then did the majority of the street analysts
think we were going over 200,000 on Friday. It boils down
to hype. The bullish sentiment was so strong that everybody
starts exaggerating to move out of the crowd. The first
guy says 150K, the second 160K, and so on. By the time
it makes the rounds the first guy is thinking he missed
something and raises his estimates again thereby starting
the process all over. Economic Bubblemania.

Why is this important? New jobs produce new consumers. A
drop in jobs removes consumers from the economy. Sure they
continue to buy food and pay rent in some form but they
are not out buying HDTVs from Gateway, Harley motorcycles,
2004 cars from GM or houses from Ryland. According to the
Jobs report 309,000 workers chose a lower standard of
living in December by dropping out of the workforce. That
translates directly to a drop in sales at Wal-Mart and
Target each month it occurs. Actually I am wrong. It
probably helps Wal-Mart and hurts ANN, GPS, SAKS, BBY and
JWN. Wal-Mart gains a new part time welcome greeter and
they spend their meager paycheck in the store. Jobs
produce consumers, consumers produce earnings.

Ten Year Note Yields



The best thing from the Jobs report was the certainty that
the Fed is on hold for probably all of 2004. This will keep
them from making changes for the next three months and once
past the May-4th meeting the political implications will
keep them from raising the rest of the year. Yields on the
ten-year notes fell to 4.08% and a three month low. (red
candle on the chart above) The drop on the yields was the
biggest move since September. This is good for the economy
and for the interest sensitive sectors. Homebuilder stocks
were mixed on the news despite a glowing guidance statement
from Pulte Homes (NYSE:PHM) saying their orders soared +31%
in the 4Q to over 8,000 units. The reaction to the sector
was mixed because they applauded the drop in rates but
worried if unemployment will become a bigger sales issue.

Money does not appear to be a problem for the markets. The
mutual fund cash flows soared to +$3.8 billion for the week
ended on Wednesday and stretched the string of positive
weeks to nine. This is the longest positive inflow streak
in three years. According to reports nearly $20 billion
flowed into money market funds in December, not stock funds.
This would suggest there is plenty of liquidity available
but most investors were not ready to plunge into the stock
market. This suggests there are plenty of buyers at the
right price.

Helping the markets in late morning was a change in the
threat level from orange to yellow. The markets celebrated
for about 20 min then went back to business as usual. The
change did not affect all sectors or geographic locations
but Tom Ridge would not say who or what was staying on
orange.

Despite the bad jobs numbers the market barely even blinked.
The indexes had the obligatory gap down open but the Nasdaq
roared right back to set yet another new high at 2113. The
rise in techs dragged the Wilshire 5000 to 11018 and a new
high but the broader index rose reluctantly, kicking and
screaming. The Dow never regained yesterday's highs and
struggled to break 10550 all day but was never successful.
About 1:30 the Nasdaq recovered from some profit taking at
the morning highs and managed one more upward push to set
the 2113 high before the selling began. The Dow and Wilshire
succumbed to the selling pressure and finally stop the
Nasdaq advance. Once the momentum changed it began to pick
up speed and the Dow finally cracked the 10520, 10500 and
10475 intraday support from earlier in the week and closed
down -133.

The Dow has stair stepped up in 20 point increments for the
last week but before that we were moving up in 100 point
sprints. Support levels for Monday begin at 10450 with
good support at 10400. Below 10400 it begins to thin out
to about 10000 where the 50DMA comes into play. The Nasdaq
has support at 2075 but if that breaks we could get to a
gap fill at 2000 rather quickly if the selling continued.
The Wilshire has decent support in the 10800 range and
very good support at 10400. The charts below show the Dow
with two very good indicators. Each is suggesting that we
could see some weakness ahead. In contrast the Nasdaq
chart shows the MACD still rising and still below previous
highs.

Dow Daily Chart with RSI


Dow Daily Chart with MACD



Nasdaq Daily Chart with RSI


Nasdaq Daily Chart with MACD




The first week of 2004 was a banner week. At the highs
Friday the Nasdaq was up +5% and the Dow +1% for the year.
The Nasdaq is rallying off six-year lows not seen since
July of 1996 and has gained +1000 points in the last 15
months. The Dow has gained +3200 points from the March
lows just nine months ago. The stall at the 2002 highs
has been expected. The biggest surprise has been the
strength of the rally to this point.

A Dow drop of -133 and a Nasdaq close -26 points off its
highs is nothing. This was simply a one-day profit taking
event prompted by the strong gains for the week and the bad
Jobs report. This should not be interpreted as a correction
or the beginning of a bear market. There is so much bullish
sentiment under the market that any further drops are not
likely to be swift or sharp. What we had on Friday was a
normal event on bad data. If it continues next week then
it could morph into something worse but regardless of the
depth it is still a buying opportunity.

Next week we begin the Q4 earnings announcement cycle. We
have seen a pickup in guidance announcements last week and
they went both ways, positive and negative. Dow component
Alcoa released earnings Thursday night and on the surface
the news was good. After closer examination there were a
number of unusual items and a benefit from a lower than
expected tax rate. What started out as a good report
turned into an earnings miss and the stock dropped about
-5% Friday morning. Alcoa will not be the only company
that does live up to expectations. Next week the releases
pick up speed and importance.

Wednesday begins the tech parade with AAPL, LLTC, PLNR,
QLGC, TER, YHOO and INTC. Thursday we have JNPR, SUNW,
ASML, CREE, DGII, EXTR, FCS, RMBS, TMTA and VNWK. Friday
we get GE. This list of earnings reporters is far from
complete but the ones I listed should give us a pretty
good idea how the rest of the month will go. If we see
several of the techs going soft on guidance then we could
see additional weakness in the markets. If they beat the
estimates and raise guidance then the Nasdaq could retest
the Friday highs. Because of the very strong gains in the
last six days strong expectations have been priced into
the market. Just like the strong expectations were priced
into the Jobs report a disappointment in these earnings
could be a challenge.

Traders will be looking at the economic reports for next
week for confirmation that the recovery is still alive.
We start on Monday with the Kansas Fed Manufacturing
Survey. Tuesday is the Richmond Fed Survey. Wednesday
the PPI and the Fed Beige Book. Thursday we get the CPI,
NY Manufacturing Survey, the Philly Fed Survey and the
MAPI Survey for Q4. Friday has Business Inventories,
Consumer Sentiment and Industrial Production. Make no
mistake this is a very full week.

Wednesday is the key day with two Fed surveys out of the
way, the Beige book, AAPL, YHOO, QLGC and INTC earnings.
This is an information overload day and what happens on
Thursday will be a direct result. Nobody expects YHOO or
INTC to miss earnings so the key is always the guidance.
The risk is a simple guidance affirmation. If they do
not guide higher in some form we could see trouble. So
far in 2004 the techs have led the league in base hits
and home runs. Gains have been astronomical in SUNW +18%,
JNPR +19%, RMBS +16%, TMTA +22%, JDSU +23% and TLAB +20%
to just name a few. The valuation calls are already
beginning. For instance Morgan Stanley downgraded Lucent
on Friday saying the gains were overdone. With techs only
expected to gain +22% overall in 2004 there is obviously
a disconnect. All the predicting and forecasting is over
and next week is where the rubber meets the road.

Earnings are generally expected to come in at +22% for
the 4Q with Thomson Financial suggesting they could be
as high as +28%. This is huge if it really comes to
pass. It would be the best earnings quarter since 1993.
The stage is set and the curtain is rising. All we need
is for the stars to give the performance of the decade.
Can they do it? Can they meet these very strong
expectations? Check back next week and we will see how
many are nominated for Oscars and how many were booted
off the stage.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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

Extremes
Jonathan Levinson

Extreme became moreso on Friday with the release of disappointing
economic data at 8:30AM, with the US Dollar Index diving to 85
support, silver, various foreign currency pairs and the CRB
breaking to new multiyear highs, gold bouncing to the top of its
rising wedge, and the NQ setting new highs for the year.  The ES
and YM were the laggards, with the YM leading the afternoon
selloff. Treasuries broke strongly to the upside

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 markets and the press continue to do their best to ignore the
diving US Dollar Index, and until today, the lower dollar has
spelled higher equities and commodities valued in those dollars.
Friday's news saw commodities continue higher, and for much of
the session the NQ followed suit, but the afternoon break
reversed the move in equities, with all of the major indices
closing in the red.  The CRB added 1.56 to close at 267.77, led
by cocoa, silver and sugar futures.


Daily chart of February gold


February gold futures added 2.60 to finish at 426.60, putting in
a higher low and higher high and adding .61% for the day.  The
XAU rose 1.44% to close at 110.54, HUI +1.93% to 248.74.  March
silver broke its recent highs, jumping 4.13% to close at 6.506.
The move in gold flipped the trending daily cycle oscillators
back up, with price testing rising bear wedge resistance at 428.
I continue to expect trend corrections from all of the very
extended charts I'm following, and gold is no exception despite
my fundamental bullishness on it and commodities in general.  If
the dollar bounces, we should expect gold to correct.  Goldbugs
need to see the week's high above 431 broken on a closing basis
to invalidate the bear wedge currently in play.  Support has
risen to the 421 area, with Friday's intraday low at 421.50.


Daily chart of the ten year note yield


Bonds spiked higher very quickly on Friday, launching on the 8:30
releases and driving the 10-year treasury note yield (TNX) down
an impressive 16.3 bps (-3.84%) to close at 4.086%.  Support was
found at the lower Bollinger band, but the closing print was
below price confluence, with the next stop at round number
support of 4%.  With the daily cycle downphase barely getting
started here, I expect to see that level fail as well on this
cycle.


Daily NQ candles


The NQ dived on the early morning news and then managed to bounce
to new rally highs in what proved to be one of the great bear
traps of recent memories.  The afternoon selloff did not take out
the earlier lows, but saw large upward moves in all of the
volatility indices as selling picked up.  The rejection of the
new highs left a doji reversal with the morning selloff having
exceed Thursday's low to the downside.  But looking at the daily
chart, the steep upward trend was never tested, let alone broken,
and bears need to see a break below 1510 on Monday, preferably,
to begin discussing a possible correction.  It is very, very
early to even consider a trend change, even though that's what it
feels like at every subsequent failed high.

The daily cycle oscillators left off with a bearish kiss on the
10 day stochastics, and any further downside should be sufficient
to print the first sell signal of the anticipated daily cycle
downphase.


30 minute 20 day chart of the NQ


Again, it's looking like 1510 is the level to watch, and with
price confluence between 1495-1500, bears are looking at more of
a shake than anything else on the 30 minute charts.  The 30
minute cycle oscillated some more today, but the most recent
failure from a lower oscillator high against the higher price
high should yield more selling to come on this downphase.  NQ's
72% or 11 point drop to 1520 was 25 points below the intraday
high.  The low at 1514.50 is first support, and the first sign of
trouble for bulls comes below 1510.

The low volatility seen this week has resulted in very tight
ranges and frequent oscillator reversals.  For this reason, while
my gut feels quite bearish, I will not be inclined to trust these
30 minute signals until price support fails.  I'm looking for a
break of 1510 for starters, but confluence at 1496 looks like the
more important level.


Daily ES candles


The ES dropped 9.50 to close at 1120, closing below Thursday's
low.  The daily cycle oscillators are more bearish than those of
the NQ, but again, even the briefest of glances reveals a
healthy, steep uptrend.  We've seen outside key reversals fail
numerous times, and I'm waiting for a break below 1105 ES to
consider a short term end to this leg of the bull run.  A typical
Bollinger band correction would have the midpoint, roughly
coinciding with the 22 EMA at 1100 (in this case, closer to 1096
price confluence).   A failure of that level would imply a test
of 1077 and possibly 1060 support.


20 day 30 minute chart of the ES


The break below the rising trendline did not violate the overall
rising trend on the 30 minute chart, but it's a start.  Friday
was the first session in recent memory that did not see the
indices close at the top of a steep panicked short covering
rally.  The bearish oscillator divergences yielded a steep
plunge, but with the oscillators in gear to the downside and the
daily cycles verging on sell signals, any further downside should
be sufficient to motivate longer term bulls to take profits.  The
VXO closed higher by 10.24% on Friday, indicating a concerted
move for the exits.  A break below 1096-1100 should be sufficient
to kick off the daily cycle downphase, and should line up with a
further expansion of volatility.


150-tick ES


The intraday ES, with a volume-by-price levels included, shows
confluence resistance at the 1121.25 S2 level,  with next
resistance in the 1127 area.  The short cycles were downtrending
at the close, looking for a bounce on Monday.  If a bounce
doesn't come, then the 30 minute cycle is dominant, and the
likelihood of a test of 1096-1100 will increase.


Daily YM candles


The YM printed a bearish engulfing candle on Friday, coming to
rest on rising channel support at 10440.  The first sell signal
printed on the 10 day stochastic, but this is unreliable for the
moment because it's been trending.  Another down day will confirm
the sell on the Macd and break back into the rising price channel
targeting 10300 as the upsloping lower support target.


20 day 30 minute chart of the YM


The 30 minute YM shows a head and shoulders neckline at 10450,
broken on a closing basis and implying a potential target of
10300 again.  The oversold short cycle oscillators are again
looking for an opening bounce, but if it is weak, then the 30
minute cycle downphase should take us to lower lows once it ends.

Friday was an important day, because it saw equities correct for
the first time in weeks despite a declining dollar.  I believe
that the falling dollar will eventually impact bonds and equity
prices negatively, but the strong bid in treasuries, presumably
defensive based on the Friday morning employment disappointment,
defers this shift for the time being.  With commodities including
crude oil, on the rise and bonds being bought, equities are
looking vulnerable hear, but traders must remain disciplined on
the bear side until the uptrends have been broken.


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

Correction
Jonathan Levinson

A wide ranging session completed a wide ranging week, with the
Dow falling 133 points or 1.3% to close at 10,458.89, the SPX
dropping 10 points or .9% to close at 1121.86, and the Nasdaq
losing 13.33 points or .6% to close at 2,086.  For the week, the
Dow was up .5%, the SPX 1.2% and the Nasdaq 4%.

The steady grind higher saw new record lows in the Nasdaq-based
volatility indices, with the QQV (NDX volatility) reaching the
low 19's and the VXN (Nasdaq volatility) the low 21's.  On
Friday, the Nasdaq was the strongest index, and the afternoon
selloff saw the QQV rise to close higher by 6.82% at 21.14 while
the VXN rose 5.12% to 23.01.  Compare this for the VXO (OEX
volatility), which rose 10.24% to close at 15.94, and the VIX
(SPX volatility) up 7.3%.  Volatility tends move inversely to
price in a rather close relationship, and the record lows printed
for the Nasdaq caught a great many bears off guard.  Amid stories
of central bank intervention (notably, the Bank of Japan) and
multiyear lows on the US Dollar Index, bears were caught in short
squeezes that brought new rally highs across the indices.

If the past year has taught technical traders anything, it has
been that trends continue until they end, and that bear wedges
can carry for a long, long time.  The rallies this week saw the
upper rising wedge resistance on the weekly Nasdaq tested but not
broken on a closing basis, while the Dow wedge remains broken to
the upside from the December leg of the rally.


Weekly COMPX candles


The weekly chart of the Nasdaq shows rising wedge trendline
support coinciding with price confluence at the psychologically-
significant 2000 level.  Weekly Bollinger band resistance is at
2052, and remains violated as of Friday.  This indicator is
telling us the obvious, that a correction is due.  A retracement
to 2000 would be shallow correction, and support in the 1880-1900
area should be firm.  The important question is whether the
trending oscillators on this timeframe will commence an actual
downphase or merely continue to fade hesitantly lower, teasing us
with a seemingly endless bearish divergence as price rises.  A
close below 2000 would give us a clear sell signal on this
timeframe, and would imply a downward bias for at least several
weeks.


Weekly INDU candles


The 10 week stochastic on the Dow left off on a bearish kiss, and
a down week next week would be sufficient to generate a sell
signal on this timeframe.  Note the trendline support at the apex
of the failed bear wedge at 10200 and 9950.  Bears should not be
thinking anything more than "correction" above these levels.  As
traders, profits are profits, and buying support or selling
resistance is a matter of indifference in pursuing our goal.
However, it helps to be on the right side of the market, and if
the weekly cycle rolls over, that side should be down.  Next week
is shaping up to be key on that basis.


Daily OEX candles


The OEX dropped 1.12% or 6.33 points to close at 556.55 on
Friday.  The move left a bearish engulfing print below Thursday's
low, with heavy NYSE volume following heavy volume at the year
high on Thursday.  The daily cycle gave its first tentative
indication of rolling over.  First trendline support lines up
with Fibonacci support at 546.  Given the test of Bollinger
resistance through the duration of the throwover above the
channel resistance line, even the most bullish OEX trader would
not be surprised by a revisit to 546.  We will have to evaluate
the daily cycle oscillators at that level, but if the OEX bounces
from there, then I'll be expecting higher highs for the year.
Support below 546 is at 535, 528 and 525.


20 day 30 minute chart of the OEX


The 30 minute cycle oscillator rolled over from a lower high
against Thursday's closing spike high, and this bearish
divergence usually precedes a sharp drop.  With the S&P futures
closing at their session low on Friday, we can expect selling to
continue on Monday.  By the time the OEX reaches rising trendline
support at 555, the 30 minute cycle should be at or near oversold
territory, and a bounce will be likely.  If that bounce occurs,
then bears will look for a lower high to confirm the daily cycle
downturn.  If it simply falls through 555, then bulls have a
potential problem and will look for next support in that 546
area.


Daily QQQ candles


A bad intraday tick has sliced up the daily QQQ charts.  QQQ lost
14.9 cents or .39% and closed at 37.83 on Friday.  Support is now
at 37.10, and given the rollover in the 10 day stochastic, a down
Monday will confirm the new daily cycle downphase on QQQ.  Below
37.10, support is at 36.80, 36.60, and 36.


20 day 30 minute chart of the QQQ


The afternoon selloff on Friday caused a sharp break on the 30
minute chart oscillators from deep within oversold, but the
rising trend since mid-December has been very strong.  This week
saw much heavier volume than was seen for the last two weeks of
December, and so long as the bulls hold 36, the uptrend should be
safe.  Below that level, the lighter support from December could
result in an acceleration of the selling.


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

Finally Some Weakness

The game plan for this week was to fill out the rest of the
put play by purchasing 3 more contracts at the open on Monday.
The gap up by the Dow sent the premium to 90 cents making our
average cost $1.19.

The Dow rally to new highs tanked the premium the rest of
the week and it traded as low as 55 cents. There is no stop
loss on this play and we are in it until the bitter end.

Fortunately the Dow was the weakest of the major indexes on
Friday and ended up gaining only +43 points for the entire
week. With six weeks to go on the February option we have
plenty of time.

Current support is 10400 followed by 10300. Should those
levels break it could be a quick ride to 10000.

I had several hateful emails this week suggesting that the
original target for the play of 9700 was totally unreasonable
to put it mildly.

Remember, when the play started on Dec-21st the Dow was
only 10250 and I did not in my wildest dreams expect 10600.
The original play only suggested optimistic entry points to
10400. Not very optimistic in retrospect.

This was the risk paragraph:

I am not putting a stop loss on this trade so don't buy
more than you can afford to lose. If we blow out the top
we may not get back to 10000 before the premium decays.
With the average January drop at -750 points a bounce to
10500-10600 would nearly negate the play potential. This
is very unlikely considering the current over extension
but anything is possible.

Currently the Dow is at 10458 and I do not expect it to
drop back to 9700 unless somebody big really screws up
their earnings. The 50 DMA is currently 10013 and rising.
This has been very strong support for the last 9 months.
Eventually it will fail but I do not expect that until
April.

The recommended option was the Feb-100 put. (DJV-NV)
An at the money option today would be worth around $2.00.
This suggests that selling the puts at Dow 10000 would
net something in the $1.75-$1.85 range depending on the
time it took to get there and the premium decay during
that process.

I am going to change the target to Dow 10000. While
9700 is still possible it is not likely. At least not
before any time premium decays.

On the Market Monitor on Tuesday I suggested adding to
your current position when the Dow was at 10550 using
the DJV-NX $102 strikes for $1.05. I know from emails
that several of you did. Congratulations! Those should
be very profitable at Dow 10000. Those are still only
$1.20 today if you want to increase your position.

Every play is always a risk and should not be entered
unless you are ready for the consequences. In the end
everyone is responsible for their own trades and their
own accounts. I still have faith that the January dip
will appear but that faith and $5 will only get you a
bad cup of Starbucks coffee. I personally doubled
down on Tuesday with the $102 puts. No more coffee for
me if we go bust.

DJX Chart - Daily



Initial play description December 21st
http://members.OptionInvestor.com/editorplays/edply_122103_1.asp



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

Play Recaps

Priceline.com (PCLN) Put play $18.05

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


Powerball

Sold Too Soon

It is amazing what a strong tech week can do. I know I closed
the Powerball section last week with the profit sitting at only
+36%. This was down from +94% the day after Thanksgiving. The
rally over the last week sent several of the components soaring
and value returned. I had to resurrect the section one more
time to show the results. Definitely sold too soon.

Powerball Chart




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

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

Good Luck

Jim Brown


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

1,000 Jobs
- J. Brown

If you were amazed by the non-stop climb in the major indices
over the last several weeks then you're probably awestruck today.
The fact there the markets only produced minor losses after such
a HUGE jobs miss is simply incredible.  Economists had been
expecting, on average, a gain of 150,000 new jobs for the economy
in December.  The whisper number was even higher!  Yet the truth
was nowhere close to that figure.  Only 1,000 new jobs were
created.  It will be interesting to see what direction this
number is revised in a few weeks.

Part of the bullish argument here is that such a low number
merely reinforces the Fed's concerns over a weak labor market and
strengthens the belief that they will remain on the sidelines
(from raising interest rates) for some time to come.  There is a
growing chorus for no change until 2005.  Furthermore, such a
strong lack of hiring suggests that employers are squeezing every
ounce of productivity gains from their current workforce. That
means more profits for corporations and merely fans the flames
for Q4 earnings expectations.  From this angle one might see how
the market was just ho-hum over the news.

However, the real concern is whether or not the current economic
recovery will slip from "self-sustaining" back into needing fresh
stimulus.  Then there is always the political fallout.  If the
economy doesn't start producing more jobs and quickly it becomes
a major stumbling block for the current administration and that
casts even more uncertainty over the upcoming election.  Lest we
forget, markets hate uncertainty.

Technical indicators could also come into play.  We saw the
volatility indices all reach new lows this Thursday as the
markets were peaking.  Needless to say they are screaming "market
top" but then they've been doing that for a while now. However,
this time the major indices do look extremely overbought and in
need of a correction.  Plus the ARMS index moving averages are
all approaching bearish reversal levels.  How fortunate that
we're at a key turning point as we approach Q4 earnings.  I
believe the real question this week will be investor reaction to
earnings.  Expectations are so high that it may be impossible to
satisfy them.  Instead of driving stock prices higher, investors
may use strong earnings reports as an excuse to "sell the news".


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

Market Averages

DJIA ($INDU)

52-week High: 10592
52-week Low :  7416
Current     : 10458

Moving Averages:
(Simple)

 10-dma: 10472
 50-dma: 10013
200-dma:  9305



S&P 500 ($SPX)

52-week High: 1131
52-week Low :  788
Current     : 1121

Moving Averages:
(Simple)

 10-dma: 1116
 50-dma: 1071
200-dma:  999



Nasdaq-100 ($NDX)

52-week High: 1541
52-week Low :  795
Current     : 1520

Moving Averages:
(Simple)

 10-dma: 1487
 50-dma: 1430
200-dma: 1288



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

Finally we are beginning to see the volatility indices act
somewhat "normal".  The markets hit some selling pressure on
Friday and option premiums inflated enough to send the VIX
VXO and VXN higher.

CBOE Market Volatility Index (VIX) = 16.75 +1.14
CBOE Mkt Volatility old VIX  (VXO) = 15.94 +1.48
Nasdaq Volatility Index (VXN)      = 23.01 +1.12


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.65      1,116,174       723,463
Equity Only    0.45        942,691       420,871
OEX            1.35         30,880        41,808
QQQ            1.13         70,198        79,199


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.7    + 0     Bull Confirmed
NASDAQ-100    80.0    + 0     Bull Confirmed
Dow Indust.   86.7    + 0     Bull Confirmed
S&P 500       87.0    + 0     Bull Confirmed
S&P 100       85.0    + 0     Bull Confirmed


Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


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

 5-dma: 0.98
10-dma: 0.90
21-dma: 0.93
55-dma: 1.06


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1317      1236
Decliners    1544      1848

New Highs     270       216
New Lows        8         4

Up Volume    760M     1228M
Down Vol.   1373M     1198M

Total Vol.  2148M     2445M
M = millions


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

Commitments Of Traders Report: 01/06/04

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

Oh no... the commercial traders are back to their old pattern of
doing just about nothing.  We see little change in small traders'
positions either.


Commercials   Long      Short      Net     % Of OI
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%)
01/06/04      403,721   408,729    (5,008)   (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
12/09/03      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%
01/06/04      142,844    83,518    59,326    26.2

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

Ah...we are seeing some movement here.  Commercials are upping
their long and short positions but they've turned more bullish
than the previous week.  Small traders also increased positions
on both sides of the fence but they remain optimistic.



Commercials   Long      Short      Net     % Of OI
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%)
01/06/04      175,489   240,865    (65,376)  (15.7%)

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
12/09/03     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%
01/06/04     139,433     51,909    87,524    45.7%

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


NASDAQ-100

There is little change in commercial traders' positions this
week.  Meanwhile small traders have turned very bearish with
a sharp reduction in outstanding long contracts.



Commercials   Long      Short      Net     % of OI
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%
01/06/04       42,892     37,801     5,091    6.3%

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
12/09/03       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%
01/06/04        8,035    17,911   ( 9,876)  (38.1%)

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Par for the course, commercial traders are not altering their
bets this week.  Looks like small traders are following suit.


Commercials   Long      Short      Net     % of OI
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%
01/06/04       15,697     9,497    6,200      24.6%

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
12/09/03        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%)
01/06/04        5,713     8,105  ( 2,392)   (17.3%)

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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***************
ASK THE ANALYST
***************

The Trap!

Could you please explain again, but somewhat more clearly your
comments in today's update as it relates to the "trick" or trap
created by market makers, as we all are not institutional
traders.

I will try and explain some of the comments I made in the Friday,
January 09, 2004 03:15 PM EST update, as it relates to a "trap"
that may have been developing in Friday's trade, where you the
trader must judge for yourself if you think it is possible.

You must keep and open mind.  You must have no bias.  You must
NOT believe in conspiracy theory that the MARKET is out to get
you.  You must also get in the mindset that YOU are out to WIN at
almost any cost.  You are ruthless, and anyone that messes with
you must be prepared to pay the consequences.  You must also
believe that your identity is protected, and no one will every
know that it was you that made a mistake when you admit you were
wrong.

You are the most feared bounty hunter in the world, there is no
equal.

Are you in that mindset?  Good.  You are now a market maker on
the NASDAQ, or a specialist on the NYSE.  You own the trade!  You
are king of the markets, and often times, you can dictate intra-
day trade, as you may have larger capital reserves than the bulk
market participants and have knowledge of where other buyers and
sellers exist.

The following is today's 03:15 PM EST Update at
OptionInvestor.com, where earlier in the session, I made a quick
attempt to alert traders that a "trap" might have taken place in
the NASDAQ-100 Tracking Stock (AMEX:QQQ).  I should add, the only
way I'm familiar with "traps" is I've been sucker more than a few
times, and after repetition of losing money in a trade, I know
earlier than later when I've been trapped.

03:15 PM EST Update - Partial Reprint (OptionInvestor.com)

Traders should be on the alert, and make sure that their bullish
enthusiasm didn't get out of hand earlier this afternoon,
especially in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $37.93
-0.1%, as some things I'm seeing this afternoon look, and have
the smell, that bears and bulls may have been "sucked in" at
today's highs.

The major indices have seen a rather notable reversal back to
their lows of the session with the recently weaker Dow
Industrials (INDU) 10,480 -1.1% making a new low and pacing a
late session decline.

One thing I alerted traders to, which I think is a "trick" by QQQ
market makers, is that today's trade may hint of a near-term
reversal, where a relative near-term high may be found in the
coming weeks.  Time will tell, but this is a "trick" I've seen
before, which can suck in an undisciplined trader, and the QQQ, a
popular security among traders, is perhaps the perfect place to
be alert to such trick.

NASDAQ-100 Tracking Stock - 5-minute intervals



At approximately 02:40 PM EST, I alerted traders in the Market
Monitor to be alert for a potential decline as a very suspicious
intra-day head/shoulders top appeared in the QQQ.  Traders that
may have observed the MONTHLY R2 of $38.25, which when broken to
the upside, may well have "sucked in" some overly aggressive
bulls, but also had some overly short bears, seeing yet another
52-week high, finally calling it quits.  Then... suddenly,
without notice, a bullish session turns south.

What strikes me as this being a "trick" by extremely astute
institutional traders is this morning, in pre-market trade, the
QQQ found opening support right at our DAILY S1 of $37.71, but
when I slapped a retracement on the intra-day chart (above) to
project a head/shoulder top price objective, I became very
suspicious that the downside price object at approximately $37.70
was found.

While I tried to put on a day trade short for entry at $38.20,
stop $38.25, target $37.72, the up-ticks did not come.  This
trade alert was later cancelled.

My main note to traders and investors alike, is that today's
trade does look to be "manipulated," but traders should honor
near-term stops, as this type of action can become more difficult
to interpret as it may well be an artificial trade, where some
institutional traders are pushing things around, trying to
influence other traders investors, only to fulfill the
institutional traders needs.

Stay disciplined, and honor targets and stops!

Jeff Bailey

OptionInvestor.com and premierinvestor.net subscriber might also
want to review their Friday morning 09:00 AM EST updates, when I
updated traders in their QQQ bullish swing trade to adjust their
stop loss based on the morning market conditions, but until
stopped out, continue to target the $38.20-$38.25 area as their
bullish target to take profits.  It is days like Friday, when it
can often times be very beneficial for traders and INVESTORS to
be disciplined with their profit targets, and stops.  (This trade
was stopped out for a profit not long after the market opened for
trade).

Now that you have a background as to an observation I made in
Friday's trade, I also want INVESTORS to view the above chart as
if it were a DAILY bar chart, or WEEKLY bar chart, as the pattern
recognition may come in handy some day in the future.  Since YOU
have kept an open mind, I will also let you know that traps
aren't just created at a "top," but also at a "bottom."  The
terms "top" and "bottom" are placed in quotes, as I am by no
means implying that Friday's trade is the sign of a top.
Remember.... It is impossible to identify a true top, until a
lower high and lower low is established.

"Traps," as I call them, aren't just found/recognized intra-day.
They can also be identified by INVESTORS to be alert to a
reversal of trend, where the lower high and lower low is then
recognized.

Here's an explanation of how an intra-day "trap" can be developed
by a market maker.  We're going to do some role play, and YOU are
going to be the market maker, and I'm going to be a market
participant that believes I'm smarter than the market, and I've
been shorting the QQQ, and built a rather nice bearish position
in my account.

I'm SHORT (sell short) 1,000,000 shares of the QQQ at $36.00 and
YOU were the market maker that bought my 1,000,000 shares.

You are the market maker or specialist.  YOU know at the end of
each day how many shares of the QQQ you bought from sellers
(supply) and how many shares you sold to buyers (demand).  This
knowledge is what institutional traders refer to as "order flow,"
and is what gives market makers and specialists an advantage over
you and I.  Your ONLY job is to provide liquidity for the
markets, try and make a buck or two for your firm, and make sure
you don't lose money.  You are ruthless, and within legal limits,
will do whatever it takes to make money, not lose it.

In a way, it's analogous to playing the card game of poker, where
the opponent knows what cards we hold, while we're not certain
what cards our opponent (market maker or specialist) is holding.

To be the market maker, you must become the market maker!

Background:

The QQQ recently broke above $36.00 and your order flow has been
strong, with the number of buyers (demand) outnumbering sellers
(supply) be a hefty margin.  This demand outstripping supply has
price rising in the QQQ.  You, the market maker, KNOWS that short
interest (number of shares that are currently held in short
accounts) is at record highs, and the markets are at 52-week
highs.  You know that when any security is able to achieve a 52-
week high, the odds are high that demand is firmly in control,
and at 52-week highs, every share short is now at a loss and
assessing further upside losses to infinity.

In essence at Thursday's closing 52-week high of $38.00, had the
bulk of bulls holding winning trades, and bears holding losing
trades.

Here we go.....  The market is now aware that the economy did not
generate as many new jobs as economists had forecasted.  For
months, some have been saying the market's rise was incorrect, as
the economy was not generating new jobs.  The rise in the QQQ
from $24 to $36 was outrageous and unwarranted.  The recent 2-
week's further rise from $36-$38 even furthered the case that
bulls were incorrect.

Jeff Participant:  I am short 1,000,000 shares of QQQ at $36.00
on 12/24/03, no stop and believe non-farm payrolls will be
negative, and I have been listening repeated negative
commentary/analysis that $36.00 is solid resistance.  I have such
conviction in this belief, that I truly feel I am smarter than
the market, and hold the winning hand.  However, on January 8,
2004, at 04:15 PM EST, the QQQ has closed at $38.00, I'm holding
$2,000,000.00 worth of losses, and begin to understand that I may
be wrong, and the MARKET might be right.  On January 9, 2004, I
learn that December non-farm payrolls were not as strong as
expected, and after suffering through $2,000,000.00 worth of
losses, I'm about to be proven correct!  The QQQ is going to fall
and I will be rich!

Market Maker (YOU):  You know short interest is at record highs,
and I'm short 1,000,000 at $36.00.  You're ruthless, and its time
to teach Jeff Participant and other like him, that it's a low
odds probability trade to be shorting stocks in upward trends, at
52-week highs, not be trading stops, and trading what you
believe, with no regard to what you've actually been observing.

Jeff Participant:  I can't wait to see today's carnage.  I think
the QQQ is going to easily fall to $37.00.  This is going to be
great.  Heck... if I weren't already down $2 million and close to
a margin call, I'd short another million shares and show them
bulls they didn't know what they were doing.  It's going to be a
bloodbath.  The QQQ is trading $37.70 pre-market.

Markets open for trade, QQQ falls to an early morning low of
$37.59, at 10:50 AM EST, the QQQ trades $38.01 and ANOTHER 52-
week high!

Jeff Participant:  "Oh know... what's going on here?"  Maybe I
wasn't right... oh no... margin call.  Oh... I hope $38.00 is
resistance, why didn't I close out at that 52-week high of $36.19
when I had the chance?  Oh please, oh please let $38.00 be
resistance.

Market Maker (YOU):  This Jeff P trader, short 1,000,000 is
screwed, but also sweating.  He's still not covering.  He hasn't
been looking at the charts, he's been trading his convictions,
not his observations.  He's too busy thinking he's right.  I
don't have a share of stock for this clown, he'll surely pay up
at $38.25.  Let him sweat.

So... Market Maker (YOU), comes in and starts buying QQQ, 30,000
at $38.02.... 50,000 at $38.05.... 50,000 $38.10.... (big grin on
your face), traders see this happening and jump all over it and
pick up their pace of buying (bulls buying and shorts covering
creates double the demand).  It's a new 52-week high, there's
little overhead supply, it's easy money to $38.25.

Jeff Participant:  Oh goodness me.... OptionInvestor.com told me
this morning at 09:00 AM EST that there may still be upside in
the QQQ to $38.20-$38.25, I'm going to hang on some more... its
only another $0.20-$0.25 away (I've been doing this now for
several days of $0.20-$0.25 and building losses, day after day).

Now... the QQQ is trading $38.25, then backs off to $38.19.

Jeff Participant:  Yes!  OptionInvestor.com was right.... even
though an analyst was bullish the QQQ, his target was $38.25.
He's so smart!  I'm right!  This is the top!

And here is how the Market Maker, or specialist can influence
trade, and build the trap.

Market Maker (YOU):  This Jeff P character still doesn't get it.
Here, I'll trick, or influence Jeff P into covering that
1,000,000 short.  Market Maker (YOU) comes in and takes down
(buys) 900,000 shares QQQ with a buy market to $35.27 order and
drives QQQ higher.... above $38.25.  The Market Maker (YOU) are
now net long 2,030,000 shares, supply at 52-week high is limited,
but bears are emotional, they hadn't planned for this.

Building the trap - Influencing traders to act as you want



The first thought of most investors/traders, especially those
that have been bearish despite the MARKETS making new highs (you
know this to be true, otherwise short interest wouldn't be at
record levels) is that Friday's weaker than expected non-farm
payrolls data would have the markets falling sharply at the open.

As the session unfolded, some investors/traders became surprised.
I (Jeff Bailey) didn't know for certain that the QQQ would trade
$38.25 on Friday.  If I did, I wouldn't have had traders/investor
use a protective stop at $37.64.  However, I have been noting the
upward trend (the trend is your friend, trade it) and high level
of short interest, where bears were underwater.

Jeff Participant:  Argh! I can't take it anymore!  Get me out!
Get me out.  $38.30, I'll pay, I'll pay!!!  (Jeff P and most
likely several hundred bears like him).  Certainly there were
some traders/investors that have been sitting, watching, not
believing and also decide to get back in, but it has been BEARS
that have felt the greater pain/losses.

Market Maker (YOU): Now you've got the move going, and here comes
yet another round of buying as another level the QQQ shouldn't
have traded gets taken out to the upside.  Market Maker (YOU)
sell long 1,000,000 shares at $38.30 that you bought from Jeff P
at $36, as Jeff P gladly pays up at a price I never thought the
QQQ could trade (valuations, economy, weak dollar, terrorism,
Michael Jackson).  Now Market Maker (YOU) are still net long
1,030,000 shares.  But you still sense from order flow (trying to
buy 1,000 shares at bid and maybe only getting 500, while selling
1,000 at offer and no problem getting filled as you provide
liquidity to markets), that sellers are few, as some begin to
learn/realize it might not be smart to try and short at 52-week
highs.  There's still a few Jeff Ps out there looking for cover.
There's also some overly aggressive bulls that are willing to get
on the bullish.

The TRAP.  Step #2

Market Maker (YOU): Market Makers know one thing for sure.  You
can't make price fall by shorting.  You make price fall by
selling long at the bid of other buyers to get a move lower.
Remember, the Market Maker is ruthless, and YOU are here to make
money.

Point (A):  Now the Market Maker (YOU) begins selling the offer,
,but instead of selling long your remaining 1,030,000 shares, you
begin shorting as there is still plenty of willing buyers and
supply is limited.  You start selling short at the offer, 10,000
shares at a time, and begin sensing order flow.  You can afford
to do this as you've booked a nice gain on 1 million shares you
bought lower at $36 from Jeff P and you're still long 1,030,000
shares at 52-week highs.  You short 10,000 $38.32, 10,000 at
$38.34, (no fills at $38.36), 10,000 at $38.32 and eventually are
short by the time you get to Point (B) where by now, what first
took about 4-seconds to short 10,000, is taking minutes and you
begin to sense that buy side order flow is beginning to dry up.

Point (B):  Market Maker (YOU) now hold a net long position of
1,030,000 shares, and a net short position of 3,000,000 and order
flow is at the offer is almost non-existent.  The trap is set,
and its time to see if the trap works!  For simplicity sake, we
won't count shares, but Market Maker (YOU) now limits your offer
size to 1,000 shares and as you get filled, back off to $38.25
and spring your surprise. Market Maker (YOU) show BIG OFFER of
99,999,999.  (Market participants see that and think, BIG SELLER
RUN FOR YOUR LIVES!)

Point (C):  Market Maker (YOU) having sensed buy side order flow
has dried up, begin aggressively selling your 1,030,000 shares in
the long position, hammering the bids, aggressively,
relentlessly, ruthlessly as if YOU want out and something's
wrong.  Again, YOU are trying to influence the move lower as buy
side order flow had dried up. Sell long 100,000 shares at
$38.20... 300,000 at  $38.15, 630,000 shares to  $38,00 (other
sellers join in, momentum bulls above $38.25 start bailing) and
the trap looks to be unfolding.

The Trap Unfolds - As trader begins to recognize pattern



Suddenly, a head/shoulder pattern is realized.  Will this bring
the decline that that has been set up, or created the trap?  I
quickly anchored a retracement at the high, and fit 38.2% at the
potential neckline.  If neckline broken, most likely a trap.
Suspicious how fitted technique had 100% back near $37.74

Now the Market Maker (YOU) are 0 shares net long and net short 3
million shares at higher levels.  Systematically, and with no
emotion, bid 100,000 at $37.95... filled, another 100,000 at
$37,90..... filled, and down the scale YOU bid.

Panic erupts and the head/shoulder pattern erupts.  BEARS once
again convinced the top has been found and leapfrog each other
lower at the bid, looking for up-ticks.  Market Maker (YOU) bids
300,000 at $37.90 filled in seconds, 600,000 at $37.83...
filled.... 700,000 at $37.83 ... filled.  Bid another 700,000 at
$37.71 filled on 300,000 and later filled another 400,000.

The end...

Note:  In GREEN text in upper right hand corner, it is important
for traders like you and I, to be careful of trying to anticipate
a "right shoulder" in a head/shoulder top pattern.  A market
maker or specialist has a much better sense of order flow than
you or I would have.  If market maker or specialist is unaware of
a still looming BIG buyer, the right shoulder fails, and another
large move higher can be found, as both the BIG buyer and the
market maker challenge each other to get long.  As such, traders
should follow the pattern with a stop just above the right
shoulder.

I've always wondered why, or how a MARKET knows what level to
open for trading at, under "good news" or "bad news" conditions.
The open is often found at a computer derived pivot analysis
level, closest to the prior day's close.

Jeff Bailey


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

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

Symbol  Co               Date           Comment      EPS Est

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

MTB    M&T Bank Corp         Mon, Jan 12  -----N/A-----       1.40
MDC    M.D.C Hldg            Mon, Jan 12  After the Bell      2.06
MTG    MGIC Investment Corp. Mon, Jan 12  Before the Bell     0.95
STI    SunTrust              Mon, Jan 12  Before the Bell     1.19


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

ACN    Accenture             Tue, Jan 13  Before the Bell     0.28
AMB    AMB Property Corp     Tue, Jan 13  After the Bell      0.58
ASO    AmSouth BanCorp       Tue, Jan 13  Before the Bell     0.45
ARA    ARACRUZ CELULOSE S A  Tue, Jan 13  -----N/A-----       0.55
BBT    BB&T Corp             Tue, Jan 13  Before the Bell     0.69
FNFG   1st Niagara Finl Grp  Tue, Jan 13  Before the Bell     0.15
LALW  .OB  Laidlaw Intl, Inc.Tue, Jan 13  After the Bell      0.18
PLT    Plantronics, Inc.     Tue, Jan 13  After the Bell      0.28
STT    State Street Corp     Tue, Jan 13  Before the Bell     0.65

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

AAPL   Apple Computer, Inc.  Wed, Jan 14  After the Bell      0.14
CYN    City National Corp    Wed, Jan 14  After the Bell      1.05
DAL    DELTA AIR LINE INC DELWed, Jan 14  Before the Bell    -1.66
DNA    Genentech, Inc.       Wed, Jan 14  After the Bell      0.25
INTC   Intel Corp            Wed, Jan 14  -----N/A-----       0.25
LLTC   Linear Technology     Wed, Jan 14  After the Bell      0.23
MI     Marshall & Ilsley     Wed, Jan 14  Before the Bell     0.62
NCC    National City         Wed, Jan 14  After the Bell      0.66
PKX    POSCO                 Wed, Jan 14  -----N/A-----        N/A
PCP    Precision Castparts   Wed, Jan 14  -----N/A-----       0.62
QLGC   QLogic                Wed, Jan 14  After the Bell      0.37
RJF    Raymond James         Wed, Jan 14  After the Bell      0.50
TER    Teradyne Inc.         Wed, Jan 14  After the Bell      0.00
YHOO   Yahoo, Inc.           Wed, Jan 14  After the Bell      0.11


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

AGI    Alliance Gaming Corp. Thu, Jan 15  -----N/A-----       0.27
ASML   ASML Hldg NV          Thu, Jan 15  -----N/A-----       0.00
BAC    Bank of America Corp  Thu, Jan 15  Before the Bell     1.78
BRO    Brown & Brown         Thu, Jan 15  Before the Bell     0.37
CATY   Cathay General BancorpThu, Jan 15  -----N/A-----       0.72
CBCF   Citizens Bank         Thu, Jan 15  -----N/A-----       0.42
CLC    CLARCOR Inc.          Thu, Jan 15  -----N/A-----       0.59
CMA    Comerica Inc          Thu, Jan 15  Before the Bell     0.88
CBH    Commerce Bancorp, Inc.Thu, Jan 15  Before the Bell     0.69
CFBX   Community 1st Bnkshrs Thu, Jan 15  Before the Bell     0.49
CREE   Cree Inc.             Thu, Jan 15  After the Bell      0.15
EXTR   Extreme Networks      Thu, Jan 15  Before the Bell    -0.03
FCS    Fairchild Semi Intl   Thu, Jan 15  After the Bell      0.10
FITB   Fifth Third Bancorp   Thu, Jan 15  Before the Bell     0.79
FMER   FirstMerit            Thu, Jan 15  Before the Bell     0.21
FBF    FleetBoston Finl Corp Thu, Jan 15  Before the Bell     0.64
HIB    Hibernia Corp.        Thu, Jan 15  Before the Bell     0.45
JNPR   Juniper Networks      Thu, Jan 15  -----N/A-----       0.05
MOLX   Molex Inc.            Thu, Jan 15  -----N/A-----       0.19
NCF    Natl Commerce Finl CrpThu, Jan 15  After the Bell      0.43
NAP    National Processing   Thu, Jan 15  Before the Bell     0.28
NFB    North Fork Bancorp    Thu, Jan 15  Before the Bell     0.64
PBCT   People's Bank         Thu, Jan 15  -----N/A-----       0.24
RDC    Rowan Co, Inc.        Thu, Jan 15  Before the Bell     0.07
SLM    SLM Corp              Thu, Jan 15  Before the Bell     0.49
SUNW   Sun Microsystems      Thu, Jan 15  -----N/A-----      -0.05
TCB    TCF Finl Corp         Thu, Jan 15  Before the Bell     0.88
UCBH   UCBH Hldg, Inc.       Thu, Jan 15  After the Bell      0.35
UPC    Union Planters Corp   Thu, Jan 15  Before the Bell     0.52
VLY    Valley Natl Bancorp   Thu, Jan 15  Before the Bell     0.40
WB     Wachovia Corp         Thu, Jan 15  -----N/A-----       0.88


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

ABT    Abbott Labs           Fri, Jan 16  Before the Bell     0.65
DSL  Downey Finl Corp.       Fri, Jan 16  Before the Bell     0.94
HBAN  Huntington Bancshares  Fri, Jan 16  Before the Bell     0.38
KEY  KeyCorp                 Fri, Jan 16  Before the Bell     0.53
RF  Regions Finl Corp.       Fri, Jan 16  Before the Bell     0.73
WL  Wilmington Trust         Fri, Jan 16  Before the Bell     0.54


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

Symbol  Co Name              Ratio    Payable     Executable

NRGY    Inergy GP, LLC            2:1      Jan  12th   Jan  13th
HRBT    Hudson River Bancorp, Inc 2:1      Jan  15th   Jan  16th
TARR    Tarragon Realty Investors 5:4      Jan  15th   Jan  16th
FRK     Florida Rock Industries   3:2      Jan  16th   Jan  19th
SWWC    Southwest Water Company   2:1      Jan  20th   Jan  21st
PHS     PacifiCare Health Systems 5:4      Jan  20th   Jan  21st
MRX     Medicis Pharmaceutical    3:2      Jan  23rd   Jan  26th


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

This week the Q4 earnings season reaches full force and will
continue for the next two or three weeks as announcements come
fast and furious.  We also have a very full week with nearly
18 economic reports.


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

----------------
Monday, 01/12/04
----------------
None


-----------------
Tuesday, 01/13/04
-----------------
Export Prices ex-ag. (BB)  Dec  Forecast:     N/A  Previous:     0.2%
Import Prices ex-oil (BB)  Dec  Forecast:     N/A  Previous:     0.3%


-------------------
Wednesday, 01/14/04
-------------------
Trade Balance (BB)         Nov  Forecast: -$42.0B  Previous:  -$41.8B
PPI (BB)                   Dec  Forecast:    0.2%  Previous:    -0.3%
Core PPI (BB)              Dec  Forecast:    0.1%  Previous:    -0.1%
Fed's Beige Book (DM)


------------------
Thursday, 01/15/04
------------------
Initial Claims (BB)      01/09  Forecast:    351K  Previous:     353K
CPI (BB)                   Dec  Forecast:    0.2%  Previous:    -0.2%
Core CPI (BB)              Dec  Forecast:    0.1%  Previous:    -0.1%
NY Empire State Index (BB) Jan  Forecast:    37.8  Previous:     37.4
Retail Sales (BB)          Dec  Forecast:    0.7%  Previous:     0.9%
Retail Sales ex-auto (BB)  Dec  Forecast:    0.4%  Previous:     0.4%
Philadelphia Fed (DM)      Jan  Forecast:    30.0  Previous:     32.1
Treasury Budget (DM)       Dec  Forecast: -$12.0B  Previous:    $4.7B


----------------
Friday, 01/16/04
----------------
Business Inventories (BB)  Nov  Forecast:    0.2%  Previous:     0.4%
Industrial Production (DM) Dec  Forecast:    0.7%  Previous:     0.9%
Capacity Utilization (DM)  Dec  Forecast:   76.1%  Previous:    75.7%
Mich Sentiment-Prel. (DM)  Nov  Forecast:    94.0  Previous:     92.6


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


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Contact Support
The Option Investor Newsletter                   Sunday 01-11-2004
Sunday                                                      2 of 5


In Section Two:

Watch List: Another Mixed Bag
Play of the Day: See Note
Dropped Calls: UTSI
Dropped Puts: WHR


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

Another Mixed Bag
___________________________________________________________________

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.
___________________________________________________________________

Biosite - BSTE - close: 29.90 change: +1.09

WHAT TO WATCH:  BSTE might just be a defensive play.  If the
markets pull back investors will be taking profits out of their
current positions and looking for beaten down stocks to play a
rebound.  Shares have been consolidating in the $25-30 range for
three months now and the worst is probably behind it.  We'd
consider new longs over the $30.50-31.00 level and target the
200-dma just under $40.00.

Chart=


---

Allergan - AGN - close: 80.68 change: +1.68

WHAT TO WATCH:  Shares of AGN have been very strong this past
week.  Shares shot higher, breaking resistance at $78 on rising
volume.  The stock ran straight to long-term resistance at $82
before paring its gains.  Bulls traders willing to follow this
drug stock might want to consider a bounce from the $78 level or
a breakout above $82.00 as potential entries.  The $90 mark looks
like a good target.  Earnings are in late January.

Chart=


---

Krispy Kreme Doughnuts - KKD - close: 36.30 change: -0.14

WHAT TO WATCH:  The recent consolidation in shares of KKD have
begun to narrow.  There is strong support at the $36.00 mark but
selling pressure is creating a trend of lower highs.  Whomever is
buying the stock at $36 may eventually run out of money.  A
breakdown here could portend a move to the top of the gap last
May and it wouldn't surprise us to see KKD fill that gap.  That
means bears could probably target the $32 level.

Chart=


---

Fedex Corp - FDX - close: 65.04 change: -1.34

WHAT TO WATCH:  We've had our eye on FDX for a while.  The
stock's decline has begun to pick up speed and volume has been
strong the entire week.  On Friday the stock broke through its
simple 200-dma, which should have been support.  FDX did manage
to hold at the $65 mark but it may be a temporary respite.  The
weekly chart suggests FDX might trade to the $60 level but shares
are currently oversold and overdue for a bounce.

Chart=


---


Silicon Labs - SLAB - close: 48.81 change: +1.98

WHAT TO WATCH:  The rebound in shares of chip stock SLAB look
tempting.  Volume was strong on Friday as SLAB gapped up and over
its simple 50-dma.  The rally failed at resistance of $50.00 but
that provides a good trigger point for interested bulls.
However, the play is not without caution.  SLAB's P&F chart shows
the stock running straight to resistance and stalling and the
first test of resistance on the P&F chart can be painful for the
bulls.

Chart=



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

RIMM $76.25 +4.85 - Let's all bow our heads and offer a moment of
silence for the bears who were caught in the explosion of RIMM's
share price.  Traders are buying every dip.

BAC $78.35 -0.70 - BAC appears to be forming a wide descending
channel.  Share just failed for the third time at its declining
trendline, forming a new lower high.  The stock does have
potential support at its 50 and 200-dma but bears could be
targeting a move to 72.50.

ADVP $50.50 -0.90 - We almost added ADVP to the put list this
weekend.  Unfortunately, the company is being acquired by CMX and
shares of ADVP will trade in conjunction with CMX's.  Watch for a
breakdown under the $50 mark for ADVP (or the 200-dma for CMX).


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

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
perusal.

The Watch List can be found directly above this note.


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

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


CALLS
^^^^^

UTStarcom Inc - UTSI - close: 37.40 change: -3.94 stop: 37.85

Well UTSI didn't work out very well.  An unexpected announcement
that the company plans to sell 12.1 million shares of stock to
Bank of America threw a wrench in our play.  The amount of new
stock is more than 10% of the current number of outstanding
shares.  This forced the company to readjust their earnings
numbers lower and investors did not like the news.  We are
stopped out at $37.85.

Picked on January 06 at $40.71
Change since picked:    - 3.31
Earnings Date         01/22/03 (confirmed)
Average Daily Volume:      3.0 million
Chart =



PUTS
^^^^

Whirlpool Corporation - WHR - cls: 73.31 chng: +0.53 stop: 73.50

Defying the odds, shares of WHR shrugged off the negative housing
news earlier in the week and the dismal jobs data on Friday only
added to the bullish enthusiasm, driving the stock through the
$73.50 resistance level and triggering our stop.  It was an
aggressive play, attempting to play the downside from the top of
the recent range, but a tight stop kept the damage manageable.
Despite pulling back under our stop at the close on Friday, WHR
demonstrated far more strength than we expected to see, and that
alone is enough reason to pull the plug.  If holding open
positions, look to exit on any weakness early on Monday.

Picked on January 4th at      $71.18
Change since picked:           +2.13
Earnings Date                2/05/04 (unconfirmed)
Average Daily Volume =         588 K



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

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

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

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


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DISCLAIMER
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The Option Investor Newsletter                   Sunday 01-11-2004
Sunday                                                      3 of 5


In Section Three:

Current Calls: DGX, DLX, GD, GILD, MXIM, YHOO
New Calls: STJ
Current Put Plays: CFC
New Puts: ADBE, DIA


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

Quest Diagnostic - DGX - close: 73.07 chg: +0.04 stop: 69.99 *new*

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

Why We Like It:
It has been very quiet for DGX the last couple of weeks.  There
has been very little news and the stock has virtually churned
sideways over the same period.  It is that latter observation
that concerns us.  DGX is still very much inside its wide rising
channel but the stock is falling behind the major averages, which
were hitting new highs as of Thursday's session.

An opportunity to play the rising channel is still present but
the daily chart and some of DGX's technical oscillators are
suggesting another dip in price soon.  Be on your guard.  A
strong bounce in the 71.50-72.00 region might be playable but if
DGX trades below its simple 50-dma the bulls could be in trouble.
We're very hesitant to add new long plays here and we're going to
raise our stop loss to 69.99.

In the mean time keep your ears open.  Quest is to have President
and COO Surya Mohaptra speak at the 22nd Annual JPMorgan
Healthcare conference on Monday, January 12th in San Francisco,
California.

Suggested Options:
We're cautious on new plays but bullish traders can probably best
play DGX with February strikes.  Our suggested option is the
Feb.70's.

! January options expire this Friday!

BUY CALL FEB 70*DGX-BN OI=1492 at $4.50 SL=2.25
BUY CALL FEB 75 DGX-BO OI= 599 at $1.50 SL=0.75
BUY CALL MAY 75 DGX-EO OI=2006 at $3.20 SL=1.65

Annotated chart of DGX




Picked on December 30 at $72.95
Change since picked:     + 0.12
Earnings Date          01/27/03 (unconfirmed)
Average Daily Volume:      836  thousand
Chart =


---

Deluxe Corp. - DLX - close: 42.03 change: -0.49 stop: 40.50

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

Why we like it:
Traders that thought they missed their entry point on our DLX
play as the stock neared the $43 level on Wednesday are getting
another chance.  After a very convincing breakout over the $41.80
H&S neckline, the stock found resistance at the 200-dma and is
pulling back to test that breakout level as new support.
Friday's bearish candle doesn't look encouraging for the bulls,
but it does fit within the recent trading pattern, where the
stock breaks out and then retraces to test the level of that
breakout as new support.  If that pattern holds, we'll want to
look for a rebound in the $41.50-41.75 area as the ideal entry
point.  Due to the slow manner in which the stock moves, and with
overhead resistance near $44, we aren't advocating breakout
entries on this play.  Either enter on the pullback or leave it
alone.  Remember that our eventual target for the play is the $45
level.  Maintain stops at $40.50, just under the most recent
lows, as well as the 20-dma ($40.91) and 50-dma ($40.68).

Suggested Options:
Shorter Term: The April 40 Call will offer short-term traders the
best return on an immediate move, as it is currently in the
money.  While January strikes are available, with expiration only
a week away, that seems too risky a selection, given the stock's
slow moving nature.

Longer Term: While we've listed a February strike, it currently
has low open interest.  Until some open interest builds, longer-
term traders should focus their attention on the April strikes.
Our preferred option is the April $40 strike, which is in the
money and has plenty of time until expiration.

! Alert - January options expire this Friday!

BUY CALL FEB-40 DLX-BH OI= 20 at $2.60 SL=1.25
BUY CALL APR-40*DLX-DH OI=119 at $3.10 SL=1.50
BUY CALL APR-45 DLX-DI OI=135 at $0.80 SL=0.40

Annotated Chart of DLX:



Picked on January 6th at     $42.30
Change since picked:          -0.27
Earnings Date                   N/A
Average Daily Volume =        337 K


---

General Dynamics - GD - close: 92.20 chg: -0.34 stop: 88.50 *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)

Why We Like It:
The headlines for GD remain quiet but we were surprised with a
mid-week rally for the stock and the defensive sector.  Last
Sunday we mentioned our expectation for a dip and while shares
began to drift lower Monday and Tuesday the stock reversed course
on Wednesday-Thursday.  More importantly for us GD has broken
through resistance in the 90-91 range and should have clear
sailing toward its next hurdle in the 96 region.

The second wind to GD's December-born rally has extended its P&F
breakout and raised its vertical price target to $136; but that's
a long-term target and we'd be happy with a move to $95-96.  So
how do traders play GD now?  This new breakout looks buyable.  The
initial thrust was accompanied by strong volume.  However, there's
no rush to commit money now.  The major indices look very extended
and might pull back next week.  That means traders might get
another opportunity to buy GD closer to the $90 level.  In the
mean time we're going to inch our stop up again this time to
Tuesday's low of $88.50.

Suggested Options:
January options expire soon so February strikes are probably our
best bet.  We're now suggesting the February 90s as the best play.

! January options expire this Friday!

BUY CALL FEB 85 GD-BQ OI=1016 at $7.70 SL=4.50
BUY CALL FEB 90 GD-BR OI= 918 at $3.90 SL=2.00
BUY CALL FEB 95 GD-BS OI= 224 at $1.40 SL=0.75

Annotated Chart:



Picked on December 21 at $88.78
Change since picked:     + 3.42
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million
Chart =


---

Gilead Sciences - GILD - close: 62.39 change: +1.05 stop: 57.75

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

Why we like it:
The lack of excitement that had kept GILD trading in a sedate
downward drift came to an abrupt halt on Wednesday with bullish
comments out from Merrill Lynch before the open.  That launched
the stock strongly through the top of its neutral wedge pattern,
giving us the breakout that we've been waiting for.  After a mild
pullback on Thursday, the bulls took another run at the upside,
tagging $63.90 before succumbing to broad market weakness.
Relative to the Biotechnology index (BTK.X), which gained a
paltry 0.3%, GILD's 1.7% advance looks absolutely stellar.
Adding to the bullish picture is the fact that volume was solidly
above the ADV.  As noted earlier in the week, the bottom of the
September gap (just below $64) was expected to provide some token
resistance and that's what we saw on Friday with the reversal
from the highs.  But GILD still looks strong, and appears to have
the strength to run at least to the top of that gap near $66.  So
pullbacks that find support above the top of the wedge (now at
$60) can be used for new entries, while momentum traders can
enter on a breakout over $64.  Accepting that there needs to be
some consolidation of last week's rally, we'll give the stock
some room to breathe, leaving our stop at $57.75.

Suggested Options:
Shorter Term: The February 60 Call will offer short-term traders
the best return on an immediate move, as it is currently in the
money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the February 65 Call.  This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run.  More conservative
long-term traders looking for more insulation from time decay
will want to use the May 65 Call.  Our preferred option is the
February $60 strike.

! Alert - January options expire this Friday!

BUY CALL JAN-60 GDQ-AL OI=7430 at $2.80 SL=1.50
BUY CALL FEB-60*GDQ-BL OI=8517 at $4.50 SL=2.75
BUY CALL FEB-65 GDQ-BM OI=5298 at $2.00 SL=1.00
BUY CALL MAY-65 GDQ-EM OI= 750 at $4.20 SL=2.50

Annotated Chart of GILD:



Picked on December 21st at   $59.40
Change since picked:          +2.99
Earnings Date               1/29/04 (unconfirmed)
Average Daily Volume =     3.73 mln


---

Maxim Integrated - MXIM - cls: 54.04 chg: -0.27 stop: 50.95 *new*

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

Why We Like It:
It was a good week for the semiconductor sector.  A strong
upgrade for chip giant Intel mid-week helped push the SOX to new
year and a half highs.  Investors didn't let the opportunity go
to waste on MXIM either and sent the stock toward its own new
highs.  Overall nothing has changed.  Investors are still very
excited about the prospect for another banner year for chip
sales.  Estimates range for global chip sales to rise from 17% to
20% in 2004.  Analysts have begun to raise capex spending for
chip makers with at least one analyst estimating capex to soar
40% this year.  Should this occur investors might feel encouraged
by the show of faith from chip makers to invest that much cash in
new equipment.

Shares of MXIM have put together a very strong rally this last
week on rising volume.  That's exactly what the bulls want to
see.  Even so, short-term traders may want to consider scalping
some profits now because MXIM began to fade on Friday after
hitting the $55 mark.  We'd expect a small dip towards the
$53.00-52.50 levels.  New entries can be considered there.  We're
going to raise our stop loss to 50.95, which is just below its
rising 10-dma.  Coincidentally, MXIM's point-and-figure chart
vertical count suggests a long-term price target of $71.

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

! January options expire this Friday!

BUY CALL FEB 50*XIQ-BJ OI=2284 at $5.30 SL=3.00
BUY CALL FEB 55 XIQ-BK OI=2039 at $2.20 SL=1.10
BUY CALL MAY 55 XIQ-EK OI= 919 at $4.20 SL=2.20

Annotated Chart:



Picked on January 06 at $51.89
Change since picked:    + 2.16
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =


---

Yahoo! - YHOO - close: 48.12 change: -0.46 stop: 46.25 *new*

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

Why We Like It:
Decisions, decisions...this is a tough call on YHOO.  The stock
has done very well this year as investors ramp up the stock price
ahead of its Q4 earnings announcement.  We had always planned to
exit before YHOO announces earnings but that's not until this
Wednesday, January 14th (after the closing bell).  The major
indices look VERY overbought, tired, exhausted, etc.  We could
easily see a pull back next week.  The main question next week is
will investors send stocks higher on strong earnings numbers or
just sell the news?

We could exit here at $48.00 in YHOO and that's not a bad move.
In fact we'd probably suggest it.  However, we're going to roll
the dice and keep the play open through Tuesday.  Our plan is to
close YHOO as of Tuesday's close assuming we don't get stopped
out.  Speaking of stops we're going to raise our stop loss to
46.25, just under its 10-dma.

We are not suggesting new entries at this time.

Suggested Options:
With just three days before YHOO announces we are not suggesting
new entries.

Annotated chart of YHOO:



Picked on December 24 at $45.01
Change since picked:     + 3.11
Earnings Date          01/14/03 (unconfirmed)
Average Daily Volume:      12.3 million
Chart =



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

Saint Jude Medical - STJ - close: 63.34 change: +0.34 stop: 59.99

Company Description:
St. Jude Medical, Inc. (www.sjm.com) is dedicated to the design,
manufacture and distribution of innovative medical devices of the
highest quality, offering physicians, patients and payers
unmatched clinical performance and demonstrated economic value.
(source: company press release)

Why We Like It:
On your mark.  Get set.  Go!  Well, STJ isn't quite yet at the
"go" stage but it is in its sprinter stance and ready to run.
All we're waiting on now is the starting gun.  Over the last
seven months shares of STJ have been consolidating its
Thanksgiving 2002 to June 2003 gains in a large cup-and-handle
formation.  The "cup" ended when shares peaked in late November
2003 and the handle looks ready to produce the traditional
breakout this pattern typically produces.

Contributing to investor enthusiasm for the stock was news in
late December that STJ had filed its most recent clinical data
from its Rhythm ICD study with the FDA.  STJ is hoping for an FDA
approval of its Epic HF implantable heart-failure device this
coming May.  Once approved it will be able to compete with the
like of Medtronic and Guidance.  The stock has also produced some
good news this last week.  A J.P.Morgan analyst picked STJ as one
of its two top stocks for 2004 in the medical device field.  A
Reuters article also revealed that the JPM analyst believes STJ
is a takeover candidate in 2004 and Boston Scientific and Johnson
& Johnson are top contenders to acquire the company.

We are going to play STJ with a TRIGGER to go long at $64.01.
The $64 level is strong resistance and shares have failed there
twice in the last several weeks. A move over $64.00 could be the
breakout we're looking for from this cup-and-handle pattern.
We'll start the play with a stop loss at 59.99 and an initial
target of $70.00.


Suggested Options:
We like the February and April 60s and 65s.  Our favorite is the
February 60s.

BUY CALL FEB 60*STJ-BL OI=  83 at $4.70 SL=2.35
BUY CALL FEB 65 STJ-BM OI= 899 at $1.75 SL=0.90
BUY CALL APR 65 STJ-DM OI= 362 at $3.10 SL=1.65

Annotated chart:



Picked on January 11 at $xx.xx <-- see Trigger
Change since picked:    + 0.00
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      1.4 million
Chart =



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Countrywide Financial - CFC - cls: 72.04 chng: +1.09 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:
This is precisely why we used a trigger.  After teasing us on
Thursday with a hint of a breakdown below strong support near $70
in the wake of the severe weakness in the Housing sector, CFC
caught a bounce at the open on Friday and then proceeded to trade
in a very narrow range.  We set our trigger at $69.70 (just below
Thursday's low) so that the stock would have to demonstrate
proven weakness before triggering the play to live status.
Friday's rebound at the open negated any chance of an entry
point, so we remain on the sidelines for now.  Once our trigger
is satisfied, momentum traders can enter on that initial
breakdown, while more cautious players will want to wait for a
failed rebound below the $72.50-73.50 resistance zone.  CFC
should not be able to push through its 10-dma ($74.24), as it has
been consistent resistance for the past few weeks.  Since that
average will be below $74 on Monday, it should be safe to lower
our stop to $74 this weekend.

Suggested Options:
Conservative short-term traders can use the February 75 Put,
while those with a more aggressive approach will want to use the
February 70 put.  Traders looking for greater insulation from
time decay will want to look to the April strike.  The February
$70 strike is our preferred option.

! Alert - January options expire this Friday!

BUY PUT FEB-75 CFC-NO OI=1485 at $5.40 SL=3.50
BUY PUT FEB-70*CFC-NN OI=2064 at $2.90 SL=1.50
BUY PUT APR-70 CFC-PN OI= 162 at $4.50 SL=2.75

Annotated Chart of CFC:



Picked on January 8th at      $70.95
Change since picked:           +1.09
Earnings Date                1/27/04 (confirmed)
Average Daily Volume =      1.79 mln



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

Adobe Systems - ADBE - close: 37.12 change: -0.88 stop: 40.00

Company Description:
A long-time leader in desktop publishing software, ADBE provides
graphic design, publishing, and imaging software for Web and
print production.  Offering a line of application software
products for creating, distributing, and managing information of
all types, the company generates nearly 75% of sales through
publishing software products such as Photoshop, Illustrator, and
PageMaker.  Its Acrobat Reader, which uses portable document
format (PDF) is popping up all over the Internet, as businesses
shift from print to digital communications.  In addition, ADBE
licenses its industry standard technologies to major hardware
manufacturers, software developers, and service providers, as
well as offering integrated software solutions to businesses of
all sizes.

Why we like it:
Despite the NASDAQ surging to new 2-year highs last week, shares
of ADBE have really been stuck in a rut since early November when
the stock dropped back sharply from the $46 level.  Since then,
consistent support has been found in the $37.50-38.00 area, but
that doesn't change the fact that it has been trading very poorly
relative to its peers.  A quick look at the Software index
(GSO.X) confirms the picture of weakness for ADBE, as the GSO
tagged a new 52-week high on Friday.  Not only is ADBE not
keeping up with its peers, but it suffered a significant
breakdown on Friday, dropping through the $37.50 support level
and closing just above $37.  But perhaps more importantly, the
stock also broke below the 200-dma ($37.29) at the close,
something that hasn't happened since last February.  The PnF
chart confirms the bearish picture, as Friday's drop finally
solidified the break of the bullish support line at $38 with a
print at $37.  ADBE was already on a PnF Sell signal with a $32
price target.

Turning back to the daily chart, we can see that $32 is a
significant support level, having held up the stock throughout
the June-August period.  There's the potential for some short-
term support to be found near $35 and then at $33 on the way to
our $32 target, but with the trend so clearly to the downside,
any bounces from support should just be a prelude to another
entry point.  An initial bounce into the $38-39 area will provide
a slightly better entry, but there's nothing wrong with entering
near current levels now that we've gotten a solid breakdown.  Set
stops at $40, which is above the top of the range from last week,
as well as the clustered 10-dma, 20-dma and 30-dma.

Suggested Options:
Aggressive short-term traders can use the February 35 Put, while
those with a more conservative approach will want to use the
February 40 put.  With January options expiring next week, we
haven't even listed any front month strikes.  Instead, we've
provided an April option for those looking for greater insulation
from time decay.  The February $40 strike is our preferred
option.

! Alert - January options expire this Friday!

BUY PUT FEB-40*AEQ-NH OI= 796 at $3.70 SL=2.25
BUY PUT FEB-35 AEQ-NG OI= 779 at $1.00 SL=0.50
BUY PUT APR-35 AEQ-PG OI=2393 at $1.95 SL=1.00

Annotated Chart of ADBE:



Picked on January 11th at     $37.12
Change since picked:           +0.00
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.24 mln


----

Diamonds Trust - DIA - cls: 104.69 chng: -1.32 stop: 106.25

Company Description:
DIAMONDS represent ownership in the DIAMONDS, Trust Series 1, a
unit investment trust established to accumulate and hold a
portfolio of the equity securities that comprise the Dow Jones
Industrial Average. DIAMONDS seek investment results that, before
expenses, generally correspond to the price and yield performance
of the DJIA. There is no assurance that the price and yield
performance of the DJIA can be fully matched.

Why we like it:
Following a relentless 1000-point rally from the 9600 level in
late November, the DIA finally showed tentative signs of weakness
on Friday, and it's about time.  While the reaction was a bit
delayed, a part of the afternoon weakness was undoubtedly due to
the abysmal employment numbers that were much worse than
expectations.  After an initial gap down and then sideways drift
through much of the day, the sellers finally won the tug of war
and sent the DIA plunging to a 1.24% loss, closing near the low
of the day.  Volume was strong at more than 9 million shares and
price closed below the 10-dma ($104.86) for the first time since
this 7-week rally began in late November.  Adding to the forecast
for more downside is the fact that daily Stochastics and MACD
oscillators are tipping over in early Sell signals.

We're not looking for a collapse in the DIA over the near-term,
but it looks like some long-overdue profit-taking is starting to
get underway.  We'll target a drop to the $100-101 area, which is
roughly equivalent to the 62% ($99.80) and 50% ($100.99)
retracements of the rally over the past several weeks, as well as
the site of the 50-dma ($100.33).  The best part is that we can
very clearly control our risk with a stop just over $106.  That
is the site of major resistance, both from a horizontal and long-
term descending trendline standpoint and it looks like last
week's foray up to that level resulted in an island reversal, a
bearish formation.  There is now intraday resistance in the
$105.00-105.50 area, so we can use another rally failure near
there as a high-odds entry point.  Traders looking for proof of
weakness before playing will want to wait for a drop under
Friday's low with a trade at $104.60.  Set stops initially at
$106.25

Suggested Options:
With strikes at one point intervals, the DIA gives us plenty of
choices, from in the money to out of the money.  Due to January
expiration next week, we haven't bothered to list any January
strikes.  Aggressive traders can consider the $103 or even the
$102 strike, while those with a more cautious approach can select
either the $104 or $105 strikes.  Our preferred option is the
$104 strike.

! Alert - January options expire this Friday!

BUY PUT FEB-105 DIA-NA OI=3963 at $2.25 SL=1.10
BUY PUT FEB-104*DIA-NZ OI=5042 at $1.90 SL=1.00
BUY PUT FEB-103 DIA-NY OI=7656 at $1.45 SL=0.75
BUY PUT FEB-102 DIA-NX OI=1464 at $1.25 SL=0.60

Annotated Chart of DIA:



Picked on January 8th at     $104.69
Change since picked:           +0.00
Earnings Date                    N/A
Average Daily Volume =      5.67 mln



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The Option Investor Newsletter                   Sunday 01-11-2004
Sunday                                                      4 of 5


In Section Four:

Leaps: Let The Selloff Begin!
Traders Corner: Build Your Ark Before It Gets Too Deep
Futures Corner: Was That THE Top?


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*****
LEAPS
*****

Let The Selloff Begin!
By Mark Phillips
mphillips@OptionInvestor.com

It looked like more of the same last week.  Monday's sharp rally
right out of the gate erased the prior Friday's selloff and put
the broad market right back at new highs.  Sideways action
throughout most of the week and then a push up to very strong
resistance on Thursday set the stage for Friday's selloff should
any bad news appear.  And did it ever!  I don't think the bulk of
market participants really grasped the enormity of the poor jobs
report, with only 1000 new jobs create vs. expectations of 148,000
and a whisper number as high as 250,000.  It was a dose of
economic reality that I doubt has really sunk in yet.

Friday's selloff was reassuring to me, not because I want the
market to decline, but because I feel it needs to.  Following 7
weeks of marching straight up the charts, it needs to come down
significantly, just to preserve the normal cycle of rally,
decline, repeat.  Regular readers know I think there needs to be
substantial downside in this market from current levels and I see
new lows before we see new highs.  That said, I don't think this
decline (if indeed that is what started on Friday) is the
beginning of a major selloff.  As stated several times in recent
commentary, I just have a strong feeling that there will be a
concerted effort to hold things together (read: no big selloffs)
through the November election.

With all the bullish percents still in Bull Confirmed and only a
one day decline to the bears' credit, we're clearly WAY premature
in calling this the beginning of a significant selloff.  But with
price reversing from very strong resistance, particularly on the
DOW and NASDAQ, this does appear to be the place to put out some
bearish positions, looking to see just how much retracement is in
store.  All of the volatility indices (VIX/VXO/VXN) set new
closing lows last week and to call them low would be a huge
understatement.  That said, I think we can all agree that there's
nothing to preclude them from continuing to drop.

It is my sincere hope that we're going to see more normal market
action return in the immediate future and by that I mean normal
oscillations between overbought and oversold, intraday ranges
exceeding the choppy, tight-range garbage of the past few months
and more to the point, technical indicators helping to guide us in
determining what to expect from price action.  Friday's afternoon
drop was a good start, but until there is some follow-through and
we see some support levels broken, it is entirely possible that
all we saw was a Friday afternoon selloff, just like we saw last
week and to a lesser extent, the week before.

Volume levels have come back to normal, the market is grossly
overbought and due for a significant pullback, at a minimum.
Whether that comes to pass or not remains to be seen and I
certainly can't predict.  But I do view this as an ideal point to
be putting out some bearish positions.  Risk is easy to control
with stops just above last week's highs and the potential for a
significant decline (ideally near the 200-dmas) is very real,
resulting in favorable risk-reward ratios.  Just make sure to keep
your position sizes under control.  There's what the market should
do and what it is actually going to do.  Lately, those two cases
have been mutually exclusive and nobody can say whether that
irritating trend has come to an end or if it just paused for a
breather on Friday.

After dropping our DJX play last weekend, I was a bit irritated at
having missed the whole rally following the surge into the mid-
June highs and decided to see how well a Call play would have
fared if I had just held my nose, closed my eyes and bought the
breakout.  I found the results rather interesting.  At the time
(mid-June) the DJX was trading near $93, so my choice would have
been the December-04 $96 Call (DJV-LR).  The option closed on
6/17/03 at $3.20 and when I brought up a chart of the option, I
was pretty astounded by what I saw.  From mid-June until the
second week of December (let's call it 6 months), price vacillated
between a low of $1.65 and a high of $3.90.  During that period of
time, the DJX pulled back to $90 and then steadily advanced to
$100.  A $7 advance, with a maximum gain of only $0.70!!

This is what happens in a creeping price move, when volatility
continues to collapse.  Remember back in mid-June, the VIX was
still above 20 and by early December, it had fallen to 16!  So
even if we had picked the right direction, we still would not have
experienced any significant price gains until the DJX broke ABOVE
$100, which throughout most of the summer and fall, I viewed as an
extreme upside possibility.  Of course, we now know that the
lion's share of the price advance in the DOW has been due to the
decline in the dollar, which has fallen to levels I really didn't
expect to see so soon either.  It just goes to prove that the
market takes great pleasure in doing what we don't believe is
possible!

I bring this example to everyone's attention to help us all with
our education in the constantly changing world of option trading.
We actually tried a bearish play on the DJX during that time
period and lost due to the continued creeping rally.  But at the
same time, we can see that a bullish position trade would not have
done us any good either.  Buy and hold for a 6 month period in a
steadily rising market would have resulted in par to slight gains.
Is it any wonder that it's been tough to make a buck by buying and
holding options over the past several months?  This (along with
our very disappointing WMT play) are the clearest examples I've
ever seen in my trading career that show the deleterious effect of
steadily declining volatility.

The dollar continues to drill to new lows and at some point, I
believe this decline will cause a different reaction in the equity
markets, with foreign investors realizing that it no longer makes
sense to hold rising stocks, when the price gains are completely
wiped out (or more) by the fall in the local currency.  But when
that shift in sentiment occurs is anyone's guess.  For now, our
best course of action is to play what the market gives us, and
this certainly looks like the right place to be trying to game the
downside.  Now let's turn our attention to the individual plays
we're covering, because it was another very busy week.

Portfolio:

WMT - Just to cause us a Maalox moment, WMT got a big surge
upwards on Thursday in response to the company's same store sales
(up 4.3% vs. 3.3% consensus).  The stock surged through our $54
stop, but proving there is plenty of supply, the stock reversed
from its opening high and dropped to close just above $53.
Fortunately, we use closing stops here, and the play stayed alive
for one more day.  The negative impact to the market of the Jobs
Report on Friday exerted further pressure on the stock, resulting
in another solid drop heading into the weekend.  The stock is
still performing well for us and looks like it could finally break
down to $50 or lower over the next week or two, pressured by the
expected decline in the overall market.  Unfortunately, our LEAPS
are not performing well, due to the pricing irregularity that
we've mentioned here on several occasions.  I'm still suggesting
that a drop into the $48-50 target area should be used to exit the
play so that we can get out with at least a minor gain.  Maintain
stops at $54 just in case the breakdown does not occur.

SBUX - Although it continues to amaze me, I'm certainly not going
to argue with the continued rise in shares of SBUX.  The stock
managed to tag the $34.50 level on Tuesday, following Monday's
report of an 11% rise in same store sales and the company raising
the EPS target for 2004 from $0.83-0.85 to $0.84-0.87.  Sell the
news was the result and by the end of the week, the stock was back
near the $33 level.  That still keeps shares well inside the
aggressive ascending channel that began in June.  Part of the
weakness late in the week was likely due to a downgrade from RBC
Capital Markets, but the firm also raised their price target to
$34.  I still view SBUX as having more upside in the next several
months, with $37 quite achievable and I wouldn't be at all
surprised to see $40 by year's end.  Note that $40 corresponds to
the top of the longer-term channel that the stock broke above back
in October and has used as a price magnet ever since.  It won't
get there in a hurry, but seems to have a nice steady trend in
place.  I'm maintaining a liberal stop at $28 for now.

QQQ - I'm sure I don't have to tell you that I was a bit surprised
at the ease with which the NASDAQ pushed through the 2000 level
last week and rallied right through 2100 on Friday.  That had the
QQQ surging through our $38 stop and I had resigned myself to
having to write a drop this weekend.  But it seems that a bit of
rationality came into play towards the end of the day, as the poor
jobs data began to sink in.  The QQQ fell to close just below that
stop and kept the play alive for one more week.  Is this the
beginning of the long-awaited profit taking?  I wish I knew.  But
from a risk-reward standpoint, I certainly view this as a very
attractive entry point.  I like it so well, that I added to my own
position and I'm going to do something that I normally avoid --
I'm raising the stop slightly to $38.50, which is just above
Friday's intraday high.  Following the breakout over $36, we'll
now have to contend with that level as support on the way down and
the real test will come at $35, which is the site of the rising
trendline connecting the lows from September, November and
December.  If that trendline is broken, then we'll have a real
shot at the 200-dma, currently at $32.03.

DJX - From Portfolio to Drop to Watch List and back to the
Portfolio.  It has been a busy 2 weeks for our attempt to pick a
top in the DJX, but I think we may have gotten it right this time.
Full details below.

SMH - Well, I thought I was exercising enough patience!  No sooner
did we fill on the Portfolio position than the SMH lit its after-
burners, contributing mightily to the strength in the NASDAQ last
week.  Rather than rolling over from the $42-43 area, SMH powered
right through and by midday was above our $45 stop and threatening
to have us close it out this weekend.  But a nice little selloff
at the end of the day pushed the price back under $45, keeping the
play alive.  There wasn't enough weakness shown to convince me of
a top in place, but I sure do like the prospects for new entries
taken at current levels.  As with our QQQ play, I'm going to bend
the rules and raise the stop to $46 this weekend.  We'll need to
see a break of $39 support to really show us there's some downside
potential and then we can look for a more extended decline towards
the $35 level, which should coincide with the 200-dma.

Watch List:

NEM - As long as the dollar continues to decline, our prospects
for a meaningful decline in gold and gold stocks is slim at best.
That said, I can't make a case for entries near current levels
without a more significant pullback first.  NEM is where we want
to be when that pullback and entry setup materializes, but for now
we must continue to watch from the sidelines.  The XAU index needs
to come back down to the $100-102 area at a minimum and that ought
to pressure shares of NEM down to at least $44, and preferably
down to our targeted entry zone at $40-42.

QCOM - Watching the rise in QCOM these past several weeks has
truly been disheartening.  We just barely missed the entry back in
November and since then, QCOM has rallied my more than $15,
tagging a high of $59.99 on Friday.  Last week's action propelled
the stock through its 200-week moving average and the stock is
truly extended up here.  There's nothing to do now but to wait and
see how far back it drops when the profit taking does occur.
Wireless stocks are very strong right now, but chasing this sort
of strength is not conducive to capital growth.  I'm leaving QCOM
on the Watch List for now, but it remains on HOLD until we can get
a decent pullback.

EK - That's what we were waiting for and EK tapped our $27 entry
target on Friday before pulling back slightly.  EK moves to the
Portfolio this weekend.

HD - So far, so good.  HD has held up rather well over the past
week, especially in light of the extreme volatility in the Housing
sector.  Based on the earnings warning from RYL, I think it is
safe to say that the demand for homes is shrinking, pressured by
the end of the refinancing boom.  That slowdown will translate
directly into problems for HD as well, as home improvement
projects get put on hold or cancelled due to less disposable
income with which to execute those projects.  Friday's employment
report doesn't bode well for the industry either, with new jobs
clearly not being created fast enough to sustain an economic
recovery.  All we need is one more push upwards near the top of
the descending channel (currently $38.45) and we'll have a solid
entry in our hands.  Once filled, we'll look for an initial
decline down to the $32 support area, with potential for further
weakness down to the $28 level.

SNDK - Finally breaking out of its recent consolidation, shares of
SNDK managed to reach up near $70 on Friday before commencing
their pullback.  The 50-dma is falling to provide resistance and
this is where we just need to be patient.  It is too difficult to
manage risk with new positions in the $60-70 area, so we just need
to wait for the expected pullback near the 200-dma.  It isn't
likely to happen without the broad Technology market seeing some
concerted weakness, so we need to watch for that as our catalyst.
SNDK has the potential to break above the $100 level in the year
ahead, as consumers continue to gobble up those nifty little
memory cards.  But right now does not seem the time to get
aggressive with entries.  I'm raising our entry target slightly to
$52 this weekend, as the 200-dma has risen to that level, crossing
slightly above the 50% retracement at $51.84.  But raising the
target significantly does not seem prudent until we see how much
profit taking is in store for the broad market.

Radar Screen:

GENZ - Indeed, GENZ did find some resistance near $50 last week
and dropped back slightly.  But there certainly wasn't enough
weakness to prompt us to want to rush a play here.  It is that $52
level that I think is critical, so let's just see if GENZ can
reach it and how shares respond when it is touched.

Closing Thoughts:
Following the shockingly poor jobs data on Friday, we were treated
to the best selloff in the broad market that we've seen since this
rally got started 7 weeks ago.  Whether it is the beginning of a
more significant decline or just a head fake is unknowable at this
time.  What we do know is that volatility levels are very low and
we've just had a very large "January effect/Santa Claus" rally and
now we'll see if the typical January selloff arrives on schedule
as well.  My advice is to lean to the downside for now, adding to
positions as market action proves that we're on the right side of
the action.  Remember, we're unlikely to see a waterfall decline
like we've seen in recent years unless there is a significant
exogenous event.  We're playing for a moderate decline and then
we'll look to switch sides and play the upside in anticipation of
more bullish action leading up to the election in November.

Have a great week!

Mark


LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
SBUX  11/24/03  '05 $ 30  ZOS-AF  $ 4.30  $ 5.50  +27.91%  $ 28.00
                '06 $ 30  WSP-AF  $ 6.40  $ 7.30  +14.06%  $ 28.00


Puts:
WMT   10/03/03  '05 $ 55  ZWT-MK  $ 5.10  $ 5.70  +11.76%  $ 54.00
                '06 $ 55  WWT-MK  $ 7.20  $ 7.00  - 2.78%  $ 54.00
QQQ   12/09/03  '05 $ 32  ZWQ-MF  $ 2.65  $ 1.20  -54.72%  $ 38.50
                '06 $ 32  WD -MF  $ 3.70  $ 2.20  -40.54%  $ 38.50
SMH   12/30/03  '05 $ 40  ZTO-MH  $ 4.90  $ 3.80  -22.45%  $ 46.00
                '06 $ 40  YRH-MH  $ 6.60  $ 5.70  -13.64%  $ 46.00
DIA   01/05/03  '04 $100  DJV-XV  $ 4.50  $ 4.20  - 6.67%  $107.00
                '05 $100  YDK-XV  $ 6.80  $ 6.40  - 5.89%  $107.00
EK    01/09/03  '05 $ 25  ZEK-ME  $ 2.60  $ 2.60    0.00%  $ 31.00
                '06 $ 25  WEK-ME  $ 3.70  $ 3.70    0.00%  $ 31.00


LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
NEM    10/05/03   $40-42       JAN-2005 $ 40  ZIE-AH
                            CC JAN-2005 $ 35  ZIE-AG
                               JAN-2006 $ 40  WIE-AH
                            CC JAN-2006 $ 35  WIE-AG
QCOM   11/16/03   HOLD         JAN-2005 $ 50  ZLU-AJ
                            CC JAN-2005 $ 45  ZLU-AI
                               JAN-2006 $ 50  WLU-AJ
                            CC JAN-2006 $ 45  WLU-AI
SNDK   12/21/03   $50-51       JAN-2005 $ 45  XWS-AK
                            CC JAN-2005 $ 40  XWS-AJ
                               JAN-2006 $ 45  YSD-AK
                            CC JAN-2006 $ 40  YSD-AJ



PUTS:
HD     12/21/03  $37-38        JAN-2005 $ 35  ZHD-MG
                               JAN-2006 $ 35  WHD-MG


New Portfolio Plays

DJX - Dow Jones Industrials $104.59  **Put Play**

Expecting that the much-anticipated top was close at hand, I
rotated our DJX play right back onto the Watch List last weekend,
fresh from being stopped our of our prior bearish play the week
before.  It's no secret that I was surprised to see the DJX be
able to charge up to the $106 level, but that's precisely what
happened late last week.  After plowing through first the $102 and
then $104 resistance levels, the index was definitely up on stilts
and just needed the right catalyst to push it over the edge.
Friday's dismal showing from the Jobs Report seems to have been
that catalyst and the index suffered its biggest one-day loss
since this rally began near the $96 level.  Just a normal dose of
profit taking should drop the DJX back down to the $100-101 area,
which is the site of the 50-dma ($100.08).  Should the selling
actually pick up some momentum, we could see the $96-97 area
tested, and we'll consider it a real gift to see those levels
again in the next couple months.  As stated last weekend, we were
looking for another surge over $105 for entry into the play and
Monday's action served that up with a close at $105.44.  Traders
that waited for the breakdown under $105 on Friday, they actually
got a better entry due to lower volatility levels depressing the
option prices.  We'll set an initial stop at $107, which is just
above the 2002 highs and should not be touched if there is any
downside potential in the index.

All right, it's confession time.  I erred last weekend when I
listed the $100 strikes for the DJX play.  Fortunately, an astute
reader (thanks Kathy!) was kind enough to ask why I did what I
did.  Normally, we select LEAPS that are one strike out of the
money, as that normally corresponds to a delta of about 50 (LEAPS
have higher deltas ATM than near-term options due to the
additional time value).  What I should have done last week was
select the $104 put LEAPS, rather than the $100 strike.  The DJX
options are listed in $4 increments.  Since we were targeting an
entry above $105, the strike just out of the money would have been
the $104.  Normally, I just would have made a correction this
weekend, clearing up any confusion.  But with our DJX play making
the move to the Portfolio this weekend, I need to stick with the
listed strike as a matter of consistency and integrity.  For
traders that have not entered the play, my suggestion would be to
use the $104 strike.  If already in the play, I would not suggest
making a switch to the $104 strike, as time decay really won't be
a factor for several months.  Hopefully that provides clarity
rather than confusion, but if you have any questions don't
hesitate to drop me an email.

BUY LEAP DEC-2004 $100 DJV-XV $4.50
BUY LEAP DEC-2005 $100 YDK-XV $6.80

EK - Eastman Kodak $26.90  **Put Play**

As one of the most beaten down stocks in the DOW over the past
year, 2 years, 3 years - you get the picture - EK is long overdue
for some upside action and it finally materialized over the past
couple weeks.  Helped along by the continued strong action in the
broad market, EK broke out of its bull-flag pattern and by Friday
managed to touch our $27 entry target before weakening ever so
slightly into the close.  I really couldn't have asked for a
better entry point, especially with weekly Stochastics nearing
overbought and offering the potential for bearish divergence.  So
long as we get a sell signal on the weekly Stochastics before
price moves through the September high just over $30, that
divergence will be confirmed and will give us very good odds of
the stock falling to test and possibly break its recent lows in
the vicinity of $20.50.  Looking at the PnF chart, we can see that
EK is still on a Sell signal and the bearish price target is $17,
so there is definitely potential for lower levels ahead.  Price
action has recently reversed into a column of X and it would take
a trade at $31 to generate a new buy signal and negate that
bearish price target.  So we'll set a liberal stop for the play at
$31 and let gravity do its work as investors once again focus on
the economic reality that this shrinking company is not the
bargain they're hoping it is.  Entries look good all the way up to
the $28-29 area, so more patient traders may be able to gain an
even better entry in the weeks ahead if the stock manages to push
through the 200-dma.

BUY LEAP JAN-2005 $25 ZEK-ME $2.60
BUY LEAP JAN-2006 $25 WEK-ME $3.70


New Watchlist Plays

None


Drops

None


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Build Your Ark Before It Gets Too Deep
By Mike Parnos, Investing With Attitude

God told Noah it was going to rain.  We don't know if he told him
in person or sent an email – but, one way or the other, the news
leaked out.  Fortunately, as the story goes, the ark didn't leak
and mankind (and animal-kind) was saved.  Isn't that sweet?  We
all like stories with happy endings.

For those of us who use neutral trading strategies, it's been
pouring all month – and our index prices have been rising with the
tide.  This wasn't an umbrella and galoshes kind of rain.  This
was torrential.  It's a good thing that most Couch Potato Trading
Institute students were prepared.  Some of our profits were washed
away, but we still have plenty left as we live to trade another
day.

Is the rain subsiding? We don't know.  The QQQs are still rising.
So we have to be prepared to possibly adjust the trading
range in our QQQ In-The-Money Strangle position.

I haven't seen detailed articles devoted to the actual rollout
process. That's what we're going to discuss today – just in case
the rain doesn't stop reasonably soon.   So, turn off the TV, the
radio, put down your Penthouse and focus.  This is good stuff to
know.
____________________________________________________________

Different Methods Of Roll-Playing
There are a number of ways to roll out your positions.  A lot
depends on your brokerage firm and the flexibility of their
trading software.  Regardless, when making a range adjustment in
our QQQ In-The-Money Strangle strategy, you need to be careful.

Method:  One Option At A Time
I'm going to assume that the majority of CPTI students do not have
the trading level to trade uncovered options.  Plus, in their
online brokerage, they may not have the ability to place trades as
spreads.  Therefore, when you're adjusting your position, you may
have to do it one option at a time.  If so, there's a particular
sequence that must be followed.

1.  You should first buy back your short near term call before you
try to sell your long LEAPS call.  Why?  Because if you try to
sell your LEAPS call first, you'll likely get one of those nasty
messages on your computer screen reminding you that you don't have
uncovered trading approval levels.  If the brokerage first
permitted the sale of the long LEAPS, it would leave your near
term short option uncovered – and that's a no-no.

2.  Once you buy back your short near term call, it releases your
LEAPS call to be sold.  Once filled you can then repeat the
process with the put side.

3.  Once your LEAPS are sold and your near term short options
bought back, you then are free to purchase your new LEAPS.

4.  Once your new LEAPS are in place, you can sell a short near
term option against each of them.

Method:  Let The Good Times Roll
Some brokerage firms (OptionsXpress and ThinkOrSwim to name a few)
have a feature that enables you to "roll" a position.  On their
trading platforms, the "roll" feature prompts you to input the
option you're closing and the option you're opening for the credit
or debit limit you want.  This is a great feature that simplifies
your trading life.  It allows you to sell and buy a long position
simultaneously.  That means you can trade the long LEAPS first and
not have to risk leaving the short near term options uncovered.

Method:  Trading As Spreads
Our ITM Strangle strategy is basically just two calendar spreads –
owning a long-term option and selling a near term option to
generate money.  Most online brokerage firms allow you to place
"spread" orders.

To close a calendar spread as a "spread", you will simultaneously
sell the long LEAPS and buy back the short near term option.

For instance, if we're rolling the short-term January calls and
adjusting our LEAPS range at the same time, you would place the
order as follows:
a) Buy to close _____ contracts of the QQQ January 2004 $34 calls
and sell to close _____ contracts of the QQQ January 2005 $29
calls at a credit limit price of $______ .

For this example, let's assume we're adjusting the LEAPS range to
$33/$43.  Then, to establish the newly adjusted call position you
would then:
b) Buy to open _____ contracts of the QQQ January 2005 $33 LEAPS
calls and sell to open _____ contracts of the QQQ February 2004
$38 calls at a debit limit price of $ ______ .

Then, you'd repeat the process for the put side of the strategy.
Having a spread screen on your online trading platform allows you
to just fill in the blanks – a lot easier.  If you have to deal
with a human, you would use the verbiage exactly outlined in "a"
and "b" – and hope the broker will understand.

Trading, using spreads, can give you the potential advantage of
placing your limit order between the posted prices and possibly
shaving off some of the combined bid/ask spread.  Why?  Because
the long LEAPS often have a $.20 bid/ask spread.  The near term
short options will likely be so liquid that they will only have a
nickel spread with no room for negotiation.

Preparing To Place The Order
One method isn't necessarily any better than the other.  The one
common denominator is that you must make sure it's very clear in
your mind what you intend to do before you start mouse-clicking or
pick up the phone to call your broker.

Wrapping Up The Roll
The rolling out and/or closing out methods I've discussed in this
article can be applied to most of our strategies.  It's one thing
to have discipline – and discipline is great!!  The willingness to
pull the trigger on a trade and act upon your disciplined decision
is even better!!

You may want to keep this article for future reference.  Placing
the orders properly can save you and/or make you more money.  It
can also avoid misunderstandings.  Tweaking and honing your order
placement skills will make you a more well rounded trader.
_________________________________________________________________

JANUARY CPTI POSITIONS
Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1520.46
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 for
$1,700 loss.

Position #2 – SOX (Semiconductor Index) – Iron Condor – 543.31
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 for $3,255
loss.

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

Position #4 -- QQQ Diagonal Calendar Spread -- $37.72
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'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.  We rolled out to the February $34 puts and our
total debit is now only $.70.
_____________________________________________________________

ONGOING POSITION
QQQ ITM Strangle – Ongoing Long Term -- $37.72
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.
February: Feb. $34 calls and $36 puts – credit of $750.

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 – 556.65
We sold 2 December OEX 520 calls @ $9.00 and bought 2 December OEX
545 calls @ $1.55.  Total credit of $7.45 ($1,490).  Exposure
$17.55 ($3,510).  Rolled out to five contracts of the January
535/505 bull put spread.  In the process we took in an additional
$280.   Total potential profit of $1,770.  Looking good.  We want
the OEX to finish above 535.
_________________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner."  They're waiting for you
24/7.
_________________________________________________________________

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

Mike Parnos
CPTI Master Strategist and HCP
_________________________________________________________________

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


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

Was That THE Top?
by Keene Little

As a follow-up to last weekend's article, I thought it would be a
good idea to review this past week and see if the targets we hit
might indicate a top is in. Notice I said a top and not THE top.
It could be THE top but we're going to take it one step at a time
and see what we can set up for short-term trades while the market
makes it clearer what the long-term holds.

Before getting into the week's review and next week's projection
I thought I would take the opportunity to review Friday's trade.
I think it highlights both good and bad judgment and makes for a
good learning example. I never like missing a trade, though I
recognize I will miss more than I capture. That's just the nature
of our business. If I miss this bus, I know they'll be sending me
another one shortly. What I really don't like is being in a
trade, getting stopped out, barely, and then watching from the
sidelines as the market moves in the direction I thought it
would, but now without me. That's what happened Friday and I
think it's worth reviewing with you.

After the gap-down opening Friday morning, following the
employment reports, the market rallied back up. The DOW was
clearly the weaker index of the three (DOW/SPX/NDX) so I wanted
to pick on it and short the YM, the e-mini futures for the DOW. I
waited for evidence the bounce looked to be failing and as the
chart below shows, I shorted YM at 10,521. I placed an initial
stop at 10,535, which was just above a fibonacci resistance level
for the second leg of the bounce. A subsequent bounce stayed
under my stop so everything was looking OK going into the lunch
hour.

Shortly after lunch the market started to rally a little bit and
I was keeping my eye on ES, the e-mini futures for SPX. The NDX
meanwhile had been rallying and was close to making new highs so
I began to think it might drag the rest of the market up with it.
I was also thinking the continuing consolidation might lead to an
afternoon rally, which is what had been occurring this past week.
So I felt it was prudent to lower the stop as close to break-even
as soon as possible so as to limit the risk in the trade. As the
market rallied back to its highs for the day, ES took out the
previous high at 1129.59 and looked like a classic breakout. Here
are the two 3-min charts showing this action:










Once the ES broke out above 1129.50, and with the NDX making new
daily highs, getting stopped out of the YM short was the right
thing to do as I was fully expecting that it too would rally to
new highs. But once ES fell back under 1129.50, which was a
failed break-out (a bull trap), and the fact that YM never took
out its previous high, it was an excellent short signal. My bias
for an afternoon rally got in the way of recognizing this setup.

So lesson learned--while we need to form a bias in order to have
the confidence to enter a trade, we need to be able to
immediately recognize a good setup and set our bias aside and
trade what we see. This is so easy to see in hindsight but so
hard to do in battle. But look at the trade I missed.

OK, on to a review of the longer-term charts to see what happened
and what to watch for this coming week. Starting with the daily
chart of the DOW:





We've been watching that downtrend line from January 2000, a
fibonacci projection for the last leg up and the top of the
longer-term up-channel, creating a target zone between 10,575-
10,625 (about 10,500-10,600 on the YM). Thursday's high was
10,592 and then Friday's candle looks like a fairly strong
reversal candle (bearish engulfing). With Thursday's high in the
DOW, we could even count the 68-day cycle still in effect. This
68-day cycle has marked significant turns for the past two years
and the turn date was January 6th, but has a +/- 2-day window.
Several other indexes, including the SPX barely, made new highs
on Friday, which went unconfirmed by the DOW. This inter-market
divergence also often marks significant turning points. And
lastly, the YM left an island reversal from Thursday--there was a
gap higher into Thursday's action and then a gap lower Friday,
leaving an "island" at the top. This is another reversal signal.
So it would appear that the pieces are in place to call a top
here, at least for this leg of the rally. But we've seen
countless reversals to new highs after these kinds of days, so
we're still on guard for another high next week.

The daily SPX chart shows a similar reversal day:



Note the reversal from a fibonacci target for this leg, which I'm
counting in Elliott Wave terms as complete. There is an alternate
EW count that shows we need a larger pullback (say to 1100 on the
SPX) and a launch to new highs for the very last leg of the rally
from the March 2002 low. If that were to happen, I could see the
SPX achieve its 50% retracement of the bear market decline from
2000. That level is 1160.75. A little later I'll show some things
I'll be watching for to give us some clues.

The NDX also experienced a significant reversal day:




The NDX stopped short of breaking back inside its ascending wedge
that it's been in since August. A penetration back inside will
leave a throw-over from this pattern, which is a typical way
these patterns end. Price hit the price projection coming out of
the triangle it formed in November/December. The candle leaves a
bearish outside down day with a higher high and lower close. Once
again, the pieces are in place for a reversal lower. Now we'll
watch for evidence of the kind of pullback we get which will help
identify it as either just a pullback before launching higher, or
if it's the real deal and the next bear market leg has begun.

I won't get into a lot of Elliott Wave details here, but if you
have any follow-up questions, please don't hesitate to ask--
keene@OptionInvestor.com. Basically for this decline, assuming
it's gotten started, I'll be looking for impulse waves down
instead of corrective. Impulse waves consist of 5 sub-waves
whereas corrective waves consist of 3 sub-waves. As the pattern
plays out, it will start to become clearer whether or not we're
moving lower impulsively or correctively. That will help me
determine whether or not we can expect a run to new highs later
this month or into February.

The 10-min chart of the YM shows what I'll be watching for on
Monday and into the week:





I'm expecting another low Monday morning as per the chart above.
It's possible we completed this move down at the Friday low and
we'll see a bounce first thing Monday morning instead of a dip at
the open. If it drops lower first, I show a fibonacci target as
low as 10,379 (about 10,400 on the DOW). That's just a target--it
doesn't mean we'll get there before seeing a bigger bounce. The
form and height of this bigger bounce on Monday, as shown in the
chart above, will help determine the next move from there. If
it's corrective, as I expect it will be, then we'll be due for
another leg lower. This second leg lower should be equal to, if
not greater than, the drop from Thursday's high to wherever the
decline stops Monday morning.

I'm going to take this decline one leg at a time but as for an
ultimate target for this pullback, a 38-50% retracement of the
rally from the December 10th low would be reasonable. That would
put the DOW at 10,200-10,300. From there it will be dependent on
whether or not the next bear market leg has started, or if we've
got one last high to make. I'll cross that bridge when I come to
it.

For those who like to play longer-term positions, such as LEAP
options, I think it's too early to take a position. My guess at
the moment is that we should have a pretty clear idea for the
year once we get through January. If we are starting down in the
next bear market leg, you will have plenty of opportunity to
position for it after the first major bounce back up. If we've
got higher highs ahead of us, you'll want to play that
possibility first.

For now (this week), I believe we can expect further downside but
there will be a lot of corrective action in between and it will
make trading difficult (so what else is new). This is opex week
and we can expect some volatility as everyone squares up
positions. I would like to be able to open up stops and let my
trades run but it may still be a tad early to do that. I think
tight stops are in order and take your lumps if you're stopped
out only to watch the market run in the direction you KNEW it was
going to go (grin).

But as I learned on Friday, watch for evidence your bias is wrong
and be prepared to jump on a market move quickly. We're still in
a very tight-range environment with the low volatility and we're
not being given much of an opportunity to grab big swings before
the market reverses. Continue to make hit and runs and take what
you can from this market. The big swings will return, but they're
not here yet.

I hope you all have a great trading week this coming week. I'll
see some of you in the Futures Monitor early Monday morning. I
intend to catch a few of those volatile swings this week.

Keene Little


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The Option Investor Newsletter                   Sunday 01-11-2004
Sunday                                                      5 of 5


In Section Five:

Covered Calls: Fundamentals Of Success
Naked Puts: More Q&A With The Editor
Spreads/Straddles/Combos: A Necessary Correction!
Market Posture: Bears Come Out of Hibernation


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

Trading Basics: Fundamentals Of Success
By Mark Wnetrzak

There are many different approaches to trading and the goal of
most techniques is to reduce the risk of loss while increasing
potential returns.

Every strategy has its advantages and drawbacks but regardless
of the approach you use in the market, there are a number of
guidelines that can help you be more successful.  While it is
almost impossible to list every idea or methodology that might
be beneficial, knowing a few of the principles that professional
market players live by will help any trader improve their results.

First, you should always be mentally and physically prepared to
participate.  The decision-making ability and emotional control
necessary to be successful is so great that it is impossible to
manage a portfolio during periods of serious health or personal
problems.  Having achieved a keen and enthusiastic state of mind,
the next step is to assume full responsibility for all actions
you initiate.  A well-known characteristic of professional money
managers is their willingness to assume personal accountability
for any trading decisions.  Those who routinely blame their losses
on unexpected events or failures by other entities, such as the
broker for "bad fills," are never successful.  It's also important
to have realistic expectations.  When one anticipates results that
are far too optimistic, objective decision-making becomes nearly
impossible, eventually resulting in emotionally driven "reaction"
trading.  If it seems like that might be a problem, ask yourself
what you really want.  Is your goal well defined and achievable?
Are you serious about devoting the necessary time and effort to
become a successful trader?  Can you overcome the urgent desire
to always be "in the market?"  In short, can you eliminate the
destructive compulsions that doom novice players long before they
have time to learn (and absorb!) the various techniques required
for profitable trading.

When you begin to explore trading strategies, keep it simple and
consistent.  Be sure that you clearly understand the risk-reward
ratio of any potential position and use only those methods that
conform to your portfolio outlook and personal trading style.
Always check the overall market indicators for primary direction.
Analyze the sector and industry in which your issue resides and
study the performance of similar groups to make sure it coincides
with your forecast.  Before making any trade, check the trend and
character of the issue against other time periods.  In some cases,
this extra step will identify areas of support or resistance that
were not previously apparent, substantially changing the outlook
for the position.  Understand that new investors often study too
many indicators and they listen to such a variety of differing
opinions that "information overload" ultimately paralyses their
judgment.  The incessant deluge of facts and figures (financial
fodder) by the media, whose true goals are to simultaneously hype,
shock, and entertain, often leave traders unable to make sensible
and unbiased decisions.  In fact, few people realize that most of
the top fund managers focus primarily on two or three fundamental
indicators and they rarely listen to the opinions of the popular
market "gurus."

Timing is everything and there is much to be said for the ability
to wait for the correct entry opportunity.  For most investors,
profit comes from the successful participation in specific plays
and as with any investment or speculative venture, the key is to
remain alert for signs of changes in character or direction, and
respond promptly and decisively, when and if such events occur.
Professional traders know they will encounter very few clear-cut
opportunities in a lifetime and yet they train themselves to wait
for the absolute best conditions before committing any funds to a
prospective position.  In this manner, they can identify the most
important elements of technical analysis and market signals that
afford the highest possible probability of a successful outcome.
When it comes to specific trading axioms, one important guideline
that new traders should adhere to is the need to outline an exit
strategy, before initiating any position, to eliminate emotional
decisions.  Using predetermined targets for profit (and potential
loss) addresses a number of problems.  First, it eliminates the
need for "judgment under fire."  Second, it keeps one from closing
a play too soon, thus reducing potential upside profits.  Finally,
developing a sound exit strategy will help you "lock-in" previous
gains, rather than exposing a winning position to a possible loss.

Trade Wisely!


SUMMARY OF PREVIOUS CANDIDATES
*****

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

Note:  Margin not used in calculations.

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

NGEN     7.50   11.99  JAN  7.50  0.90    0.90*  19.8%
PLUG     7.48    8.05  JAN  7.50  0.30    0.32*   9.7%
ARRS     7.52    9.35  JAN  7.50  0.30    0.28*   8.4%
CHU     10.05   11.30  JAN 10.00  0.35    0.30*   6.7%
WIND     7.48    9.10  JAN  7.50  0.50    0.52*   6.5%
FMKT     7.74    7.55  JAN  7.50  0.45    0.21*   6.3%
DGIN    25.08   26.12  JAN 25.00  1.10    1.02*   6.2%
CE      13.50   14.59  JAN 12.50  1.80    0.80*   5.9%
SANM    12.56   13.62  JAN 12.50  0.70    0.64*   5.9%
NGEN    11.69   11.99  JAN 10.00  1.95    0.26*   5.8%
ACF     15.58   17.03  JAN 15.00  1.15    0.57*   5.7%
HPC     12.58   12.71  JAN 12.50  0.40    0.32*   5.7%
ELNK    10.33   10.76  JAN 10.00  0.70    0.37*   5.6%
TKTX    15.35   16.50  JAN 15.00  1.25    0.90*   5.5%
PCS      5.06    5.94  JAN  5.00  0.30    0.24*   5.5%
SKX      7.54    7.95  JAN  7.50  0.40    0.36*   5.5%
XING    10.66   12.80  JAN 10.00  1.35    0.69*   5.4%
UTHR    23.20   23.09  JAN 22.50  1.75    1.05*   5.3%
NTIQ    12.53   14.60  JAN 12.50  0.85    0.82*   5.1%
VTS     10.05   12.88  JAN 10.00  0.55    0.50*   4.6%
UAIR     6.20    5.89  JAN  5.00  1.40    0.20*   4.5%
RHAT    18.88   20.39  JAN 17.50  1.90    0.52*   4.4%
MYGN    12.75   14.50  JAN 12.50  0.85    0.60*   4.4%
MYGN    12.76   14.50  JAN 12.50  0.95    0.69*   4.2%
CNH     15.27   16.74  JAN 15.00  0.95    0.68*   4.1%
CHTT    18.06   18.60  JAN 17.50  1.20    0.64*   4.1%
RHAT    17.49   20.39  JAN 15.00  3.00    0.51*   3.8%
OSTK    20.90   17.50  JAN 17.50  3.80    0.40    3.4%
EMBT    15.98   14.60  JAN 15.00  1.65    0.27    1.6%
NEOL    17.71   16.25  JAN 17.50  1.00   -0.46    0.0%

*   Stock price is above the sold striking price.

Comments:

Jobs Report Drop-Kicks The Market!

The major averages plunged on Friday after a disappointing Jobs
report failed to meet expectations.  The question is: is it simply
a good excuse for profit-taking in an over-extended market; or is
it the start of a major correction?  Either way, next week should
be very interesting, especially with the January options expiration.
As for the covered-call portfolio, the "rampant" bullishness this
first week of January was definitely welcome though it may have
caused a few cases of "sellers" remorse.  Any issues not acting as
expected should be monitored closely and may include: NeoPharm
(NASDAQ:NEOL) -- testing its 150-day MA; Overstock.com (NASDAQ:OSTK)
and Embarcadero Technologies (NASDAQ:EMBT) -- both testing their
respective 50-day MAs; and US Airways Group (NASDAQ:UAIR) --  which
continues to move lower.

Positions Previously Closed:  None


NEW CANDIDATES
*********

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

ZIXI   10.93  FEB 10.00  HQU BB  1.80  1686   9.13  42   6.9%
ALVR   13.09  FEB 12.50  QBY BV  1.45  105   11.64  42   5.4%
CREE   20.49  FEB 20.00  CQR BD  1.65  2342  18.84  42   4.5%
PAAS   16.10  FEB 15.00  USP BC  1.95  1104  14.15  42   4.4%
CHINA  11.05  FEB 10.00  UIH BB  1.60  8714   9.45  42   4.2%
NANX   12.39  FEB 10.00  NSY BB  2.90  113    9.49  42   3.9%
SEAC   18.40  FEB 17.50  UEG BW  1.75  125   16.65  42   3.7%


Company Descriptions

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

*****
ZIXI - ZixCorp  $10.93  *** New Contracts = New High! ***

Zix Corporation (NASDAQ:ZIXI) is a global provider of e-messaging
management and protection services.  Its services offer a range
of managed onsite and hosted e-messaging solutions to securely
exchange Internet communications with any e-mail user and protect
organizations from viruses, spam and electronic attack, while
delivering the ability to enforce corporate policies.  Their
advisory services and comprehensive e-messaging solutions enable
organizations of any size to streamline operations, mitigate the
risks associated with obsolescence, negligence and a series of
e-mail-borne threats, as well as leverage the cost and time
efficiencies of e-messaging.  ZixCorp solutions are managed
policy-driven services for analyzing and encrypting Internet
communications and for addressing anti-virus, anti-spam, content
filtering, reporting and archiving needs.  They also provide
related advisory, consulting, installation, customization and
training services.  ZixCorp signed a couple contracts over the
last few weeks and pleased investors have sent the stock to a
new 52-week high.  Investors who wouldn't mind owning ZixCorp
near $9 can use this position to speculate on the company's
future share value.

FEB-10.00 HQU BB LB=1.80 OI=1686 CB=9.13 DE=42 TY=6.9%


*****
ALVR - Alvarion  $13.09  *** Rally Mode: Telecom Sector ***

Alvarion (NASDAQ:ALVR) is a provider of wireless broadband
connectivity infrastructure.  Their product offerings provide
three different types of wireless broadband applications:
access, backhauling and feeding and private network connectivity.
These products provide a wireless telecommunications alternative
to wired access solutions used to provide broadband data and
voice services for subscribers in the last mile of connectivity
and for feeding cellular networks and private networks.  Alvarion's
products offer a range of integrated wireless broadband and
wideband solutions by market segment and frequency band, designed
to address the various business models of carriers and service
providers.  Their products operate in licensed and license-free
bands ranging from 2.4 GHz to 26 GHz.  In order to support its
products, the company provides a family of accessories, including
antennas, cables, surge arrestors, amplifiers and other components.
What can I say?  Alvarion is in a strong Stage II rally that is
showing no signs of stopping.  This position offers a reasonable
reward for trying to "target-shoot" an entry point near $11.60.

FEB-12.50 QBY BV LB=1.45 OI=105 CB=11.64 DE=42 TY=5.4%


*****
CREE - Cree  $20.49  *** Bracing For A Rally? ***

Cree (NASDAQ:CREE) is engaged in the development and manufacture
of compound semiconductor materials and electronic devices made
from silicon carbide (SiC), and a developer and manufacturer of
optoelectronic and electronic devices made from gallium nitride
(GaN) and related materials.  The company also produces radio
frequency (RF) power transistor components and modules for
wireless infrastructure applications using silicon-based bipolar
and laterally diffused metal oxide semiconductor (LDMOS) process
technologies.  Cree operates its business in two segments, the
Cree segment, which consists of its SiC-based products and
research contracts; and the Cree Microwave segment, which
consists of RF transistors and RF transistor modules based on
a silicon platform.  Cree had been hampered by lawsuit issues
(dropped or dismissed) and a SEC investigation but has begun
to strengthen technically.  The current outlook is recovering
and the recent bullish activity supported by heavy volume bodes
well for the future.  We simply favor the support area near $18
and investors can speculate on the short-term performance of the
issue with this position.  Earnings are due in the coming week.

FEB-20.00 CQR BD LB=1.65 OI=2342 CB=18.84 DE=42 TY=4.5%


*****
PAAS - Pan American  $16.10  *** Diversify: Precious Metals! ***

Pan American Silver (NASDAQ:PAAS) is principally engaged in the
exploration for, and the acquisition, development and operation
of, silver properties.  PAAS owns and operates the producing
Quiruvilca silver mine in Peru, a 99.85% interest in the Huaron
silver mine in Peru and the producing La Colorada property.  The
company mines and sells silver-rich pyrite stockpiles at a
small-scale operation in central Peru.  Pan American also either
holds an interest in or may earn an interest in non-producing
silver resource and silver exploration properties in Peru,
Argentina, the United States, Russia and Mexico, including the
Alamo Dorado deposit in Mexico.  Pan American continues to move
higher in a strong Stage II climb and investors who want to
diversify their portfolio should consider this position.

FEB-15.00 USP BC LB=1.95 OI=1104 CB=14.15 DE=42 TY=4.4%


*****
CHINA - Chinadotcom   $11.05  *** Asian Speculation ***

Chinadotcom (NASDAQ:CHINA) is an integrated enterprise solutions
company offering software services and outsourcing, technology,
marketing and media services and content for companies and end
users throughout greater China and the Asia-Pacific region, the
United States and the United Kingdom.  The companies under the
Chinadotcom group have extensive experience in several industry
groups including finance, travel, telecom and manufacturing, as
well as in key business areas, including e-business strategy,
packaged software implementation, precision marketing, supply
chain management and mobile applications.  Chinadotcom leverages
this expertise with alliances and partnerships to provide client
solutions.  A speculative position that offers a favorable entry
point in a "hot" sector.

FEB-10.00 UIH BB LB=1.60 OI=8714 CB=9.45 DE=42 TY=4.2%


*****
NANX - Nanophase Tech  $12.39  *** Small Is Big! ***

Nanophase Technologies (NASDAQ:NANX) is engaged in creating
and the engineering of nanocrystalline materials.  Products
include, among others, coated materials as ingredients for
sunscreens, Nanophase's largest application, and uncoated
materials as ingredients for personal care applications,
including anti-fungal aids, automotive catalytic converters
and abrasion-resistant flooring.  A growing new product area
for Nanophase is the production of engineered nanomaterials,
and their dispersion in a variety of media, for various
electronics polishing applications.  They work collaboratively
with various companies in meeting their application needs,
providing value-enhanced solutions for commercial applications
in multiple global markets.  The Nanotech industry is on fire,
especially after President Bush's signing of the 21st Century
Nanotech Research and Development Act.  We simply favor the
bullish break-out on high volume and investors interested in
the "nanotechnology" craze should consider this position.

FEB-10.00 NSY BB LB=2.90 OI=113 CB=9.49 DE=42 TY=3.9%


*****
SEAC - SeaChange  $18.40  *** Stepping Higher! ***

SeaChange International (NASDAQ:SEAC) is a developer, manufacturer
and marketer video storage servers that automate the management
and distribution of long-form video streams, such as movies or
other feature presentations, and short-form video streams, such
as advertisements.  The company sells its products and services to
cable system operators, telecommunications companies and broadcast
television companies.  The company's broadband network segment
includes its VOD (video-on-demand) System, which digitally
manages, stores and distributes digital video, allowing cable
system operators and telecommunications companies to offer VOD
and other interactive television services, including interactive
electronic advertising and retrieval of Internet content, through
TV.  SEAC made another new 52-week high as the stock continues
to "stair-step" higher.  Investors who believe the firm's shares
have moved up to a new trading range can use this position to
profit from that outcome.

FEB-17.50 UEG BW LB=1.75 OI=125 CB=16.65 DE=42 TY=3.7%


*****


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

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

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

CRGN    8.03  FEB  7.50  CQX BU  1.05  22     6.98  42   5.4%
MIMS    7.51  FEB  7.50  OQX BU  0.50  150    7.01  42   5.1%
CPN     5.34  FEB  5.00  CPN BA  0.65  6416   4.69  42   4.8%
NGEN   11.99  FEB 10.00  QEM BB  2.60  656    9.39  42   4.7%
ASKJ   23.83  FEB 22.50  AUK BX  2.70  1935  21.13  42   4.7%
VRSN   17.98  FEB 17.50  QVR BW  1.50  2512  16.48  42   4.5%
PTEK   10.15  FEB 10.00  QTE BB  0.70  1410   9.45  42   4.2%
RMBS   35.20  FEB 30.00  BNQ BF  6.80  8678  28.40  42   4.1%
PMCS   21.33  FEB 20.00  SQL BD  2.40  1728  18.93  42   4.1%
ZIGO   18.68  FEB 17.50  UZY BW  2.05  70    16.63  42   3.8%




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

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

This week’s E-mail concerns one reader's recent experience with
"naked" puts.


Hello Ray,

The market has been doing quite well for my option plays and
many of them came from your picks in the naked puts section.
That is not to say that I haven't had a few problems along the
way and even this week I was hit with a loser (Medimmune-MEDI)
due to some unexpected news.

Since I am fairly new at this strange game, I was wondering what
suggestions you had for dealing with losers like MEDI and making
naked puts a profitable part of my portfolio in the long run.

Thanks and keep-em-comin!

LW


Hello LW,

The strategy of writing deep-out-of-the-money options is based on
a high probability of achieving a small profit.  But, as with any
"premium-selling" technique, there will always be a few unexpected
losers that create draw-downs far in excess of the profits from
winning positions.  With that fact in mind, one requirement for
success is to prevent the majority of losing positions from being
"catastrophic" to your portfolio.  The best way to accomplish that
task is by setting specific limits on the collateral requirements
(loss potential) for every position in this category and through
diversity in the underlying industries/sectors selected for each
position.  Another important fact that new option traders should
understand is the probability of profit or loss is not the primary
consideration.  Equally important is the risk-reward outlook of a
position.  When one evaluates a prospective play, the likelihood
of each possible outcome must be carefully factored into the final
assessment.  After this evaluation has been completed, a question
must be resolved: Is the reward, even a limited one, sufficient to
offset the risk?  If the answer is not a resounding "affirmative,"
then it probably best to repeat the process until a satisfactory
candidate emerges.

In my experience, the key to achieving consistent profits through
"premium-selling" is to understand the statistical nature of the
strategy, which suggests that careful play selection and diligent
position management can produce (over time) a reasonable return on
investment.  However, this approach is not suitable for everyone
and many professional traders say it is one of the most difficult
strategies to master (due to human emotions) in the options market.
Fortunately, there are plenty of other ways to trade and if selling
"naked" options starts to cause you more grief than joy, switch to
a strategy that better fits your personal style, experience level,
and risk-reward outlook.

Good Luck!


SUMMARY OF PREVIOUS CANDIDATES
*****

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

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

JNPR    19.68   22.00  JAN 19.00  0.40    0.40*   4.7%  11.4%
PDLI    18.42   18.69  JAN 17.50  0.35    0.35*   4.4%  11.2%
MERX    24.75   23.77  JAN 22.50  0.60    0.60*   4.0%  10.5%
THER    18.77   20.23  JAN 17.50  0.45    0.45*   3.8%   9.5%
PDLI    16.65   18.69  JAN 15.00  0.45    0.45*   3.4%   9.0%
SIL     21.10   22.90  JAN 20.00  0.30    0.30*   3.3%   8.5%
SOV     23.70   24.08  JAN 22.50  0.90    0.90*   3.6%   8.5%
PLMD    26.45   27.25  JAN 22.50  0.50    0.50*   2.5%   7.6%
MERX    24.45   23.77  JAN 20.00  0.40    0.40*   2.2%   7.6%
BLTI    17.19   18.74  JAN 15.00  0.25    0.25*   2.5%   7.3%
SMMX    21.15   24.74  JAN 20.00  0.25    0.25*   2.8%   7.2%
SHRP    32.39   33.00  JAN 30.00  0.55    0.55*   2.7%   7.2%
IPG     15.45   16.41  JAN 15.00  0.40    0.40*   3.0%   7.1%
IMCL    40.01   38.85  JAN 35.00  0.55    0.55*   2.3%   6.9%
SLXP    21.50   22.70  JAN 20.00  0.60    0.60*   2.7%   6.8%
ATVI    18.65   18.30  JAN 17.50  0.30    0.30*   2.5%   6.6%
JNS     15.91   16.42  JAN 15.00  0.35    0.35*   2.6%   6.6%
NPSP    32.64   34.52  JAN 30.00  0.80    0.80*   2.4%   6.2%
BLTI    14.01   18.74  JAN 12.50  0.30    0.30*   2.1%   5.9%
WEBX    20.18   21.32  JAN 17.50  0.30    0.30*   1.9%   5.7%
AAII    25.00   26.35  JAN 22.50  0.30    0.30*   2.0%   5.6%
RMBS    30.66   35.20  JAN 20.00  0.40    0.40*   1.8%   5.3%
AAII    25.01   26.35  JAN 22.50  0.45    0.45*   1.8%   4.9%
EMMS    27.17   26.71  JAN 25.00  0.50    0.50*   1.8%   4.7%
BDY     26.72   24.30  JAN 25.00  0.35   -0.35    0.0%   0.0%
CYD     32.22   28.03  JAN 30.00  0.65   -1.32    0.0%   0.0%

*  Stock price is above the sold striking price.

Comments:

A Big Day For Hungry Bears!

Friday's retreat ended another week of gains, giving market bears
a morsel of profits after a long dry spell.  Equities mounted an
early rally that boosted the technology index to two year highs,
but those gains were fleeting after investors began to consider
the implications of a disappointing employment report.  With the
potential for a post-earnings slump overhanging the stock market,
traders are urged to initiate bullish positions only in the most
favorable (technically) issues and implement diligent portfolio
management in the coming weeks.  The position in China Yuchai
(NYSE:CYD) was closed early in the week and Brady Pharmaceuticals
(NYSE:BDY) is on the "watch" list.

Positions Previously Closed: None



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

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


MARGIN REQUIREMENTS

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

For more information on margin requirements, please refer to:

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


MONTHLY YIELD: MAXIMUM & SIMPLE

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


NEW CANDIDATES
*********

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

XING   12.80  FEB 10.00  QAE NB 0.35 200   9.65  42   2.6%   8.7%
OPWV   15.18  FEB 12.50  UMN NV 0.40 206  12.10  42   2.4%   7.6%
SEPR   27.25  FEB 22.50  ERQ NX 0.65 470  21.85  42   2.2%   6.9%
ASKJ   23.83  FEB 20.00  AUK ND 0.60 823  19.40  42   2.2%   6.9%
NKTR   17.12  FEB 15.00  QNX NC 0.45 454  14.55  42   2.2%   6.3%
IDCC   24.46  FEB 20.00  DAQ ND 0.50 947  19.50  42   1.9%   6.2%
WFII   17.80  FEB 15.00  QUU NC 0.40 399  14.60  42   2.0%   6.1%
JNPR   22.00  FEB 20.00  JUX ND 0.55 2098 19.45  42   2.0%   5.4%


Company Descriptions

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

*****
XING - Qiao Xing  $12.80  *** Chinese Telecom Leader ***

Qiao Xing Universal Telephone (NASDAQ:XING) is engaged in the
design, manufacture and sale of telecommunication terminals and
equipment in the People's Republic of China, including in-house
corded and cordless telephone sets under the Qiao Xing trademark.
Its QX Communication subsidiary also designs, develops and
manufactures global standard for mobile (GSM) mobile telephones
for CEC Telecom.  Qiao Xing has a nationwide sales network that
includes 3,500 retail outlets in China.  The firm has introduced
smart card telephones and expects to develop and introduce other
new products to the market.  Qiao Xing rallied in December after
a subsidiary said it expects a substantial increase in both sales
and profits over last year.  The upside activity continued this
week with the wireless sector rally and now the stock is above a
recent lateral trading range.  This position offers a reasonable
reward at the risk of owning XING shares near long-term technical
support.

FEB-10.00 QAE NB LB=0.35 OI=200 CB=9.65 DE=42 TY=2.6% MY=8.7%


*****
OPWV - Openwave Systems  $15.18  *** Wireless Rally! ***

Openwave Systems (NASDAQ:OPWV) is the leading independent provider
of open software products and services for the communications
industry.  Openwave's breadth of products, including mobile phone
software, multimedia messaging software (MMS), email, location and
mobile gateways, along with its worldwide expertise enable its
customers to deliver innovative and differentiated data services.
Openwave is another issue "riding the wave" of the recent wireless
rally.  Traders who foresee continued upside activity in the group
should consider this position.

FEB-12.50 UMN NV LB=0.40 OI=206 CB=12.10 DE=42 TY=2.4% MY=7.6%


*****
SEPR - Sepracor  $27.25  *** On The Rebound! ***

Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical firm
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.  Shares
of SEPR are "on the rebound" and traders say the catalyst may be
the company's upcoming earnings report.  SEPR will announce its
fourth quarter and full-year 2003 financial results on 1/22/2004
and traders who believe the outcome will be favorable should
consider this position.

FEB-22.50 ERQ NX LB=0.65 OI=470 CB=21.85 DE=42 TY=2.2% MY=6.9%


*****
ASKJ - Ask Jeeves  $23.83  *** New Multi-Year High! ***

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.  Jeeves is partnered with Google
and some traders believe the recent speculation about a Google
IPO is fueling the rally in ASKJ.  Regardless of the reason,
shares of ASKJ are trading at a multi-year high and there is
no indication the bullish trend will end soon.

FEB-20.00 AUK ND LB=0.60 OI=823 CB=19.40 DE=42 TY=2.2% MY=6.9%


*****
NKTR - Nektar Therapeutics  $17.12  *** Rally Mode! ***

Nektar Therapeutics (NASDAQ:NKTR) provides industry-leading drug
delivery technologies, expertise, and manufacturing to enable the
development of high-value, differentiated therapeutics.  Nektar's
advanced drug delivery capabilities are designed to enable the
firm's biotechnology and pharmaceutical partners to solve drug
development challenges and realize the full potential of their
therapeutics, from developing new molecular entities to managing
the lifecycles of established products.  Shares of NKTR are in
"rally mode" in anticipation of a positive announcement with
regard to their unique drug delivery technologies.  Traders who
like speculative positions in the pharmaceutical segment should
consider this position.

FEB-15.00 QNX NC LB=0.45 OI=454 CB=14.55 DE=42 TY=2.2% MY=6.3%


*****
IDCC - InterDigital Comm.  $24.46  *** Strong Sector! ***

InterDigital Communications (NASDAQ:IDCC) specializes in the
architecture, design and delivery of wireless technology and
product platforms.  Over the course of its corporate history,
the company has amassed a substantial and significant library of
digital wireless systems experience and know-how, and holds an
extensive worldwide portfolio of patents in the wireless systems
field.  InterDigital markets its technologies and solutions
primarily to wireless communications equipment producers and
related suppliers.  In addition, the company licenses its Time
Division Multiple Access and Code Division Multiple Access
patents to equipment manufacturers worldwide.  Stocks in the
wireless group are "hot" and IDCC shares have moved in tandem
with the sector, up almost 25% in the last week.  Traders who
believe the rally will continue should consider this position.

FEB-20.00 DAQ ND LB=0.50 OI=947 CB=19.50 DE=42 TY=1.9% MY=6.2%


*****
WFII - Wireless Facilities  $17.80  *** Follow The Crowd! ***

Wireless Facilities (NASDAQ:WFII) has become a worldwide leader
in telecommunications outsourcing, designs, deploys, integrates
and manages wireless networks and specialized security systems
for some of the largest wireless telecommunication carriers,
wireless equipment vendors and general contractors globally.
WFI provides a wide range of network services, from business and
market planning to RF engineering, fixed network engineering,
IP and data engineering, site acquisition and development,
installation, optimization and maintenance.  Investors are
flocking to stocks in the wireless group and option traders can
speculate conservatively on continued bullish activity in the
group with this position.

FEB-15.00 QUU NC LB=0.40 OI=399 CB=14.60 DE=42 TY=2.0% MY=6.1%


*****
JNPR - Juniper Networks  $22.00  *** Next Leg Up! ***

Juniper Networks (NASDAQ:JNPR) is a global provider of Internet
infrastructure solutions which enable service providers and
other telecommunications service providers to meet the demands
resulting from the growth of the Internet.  Juniper's Internet
routers are designed and purpose-built for service provider
networks and offer performance, scalability, interoperability
and flexibility, as well as lower complexity and cost compared
to legacy alternatives.  Juniper's proprietary software is
designed for the Internet protocol network routing, operations
and control requirements of service providers and is an integral
embedded component of its product family system architecture.
In December, Juniper Networks was awarded a multi-year contract
by Science Applications International to supply all edge and
core IP/MPLS routers under the Defense Department's Global Grid
Bandwidth Expansion project, which is considered the next step
in the development of the Internet.  Investors were happy with
the news and now they have pushed the issue to a 2-year high.
Traders can establish a cost basis below $20 in the issue with
this position.

FEB-20.00 JUX ND LB=0.55 OI=2098 CB=19.45 DE=42 TY=2.0% MY=5.4%


*****


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

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

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

NANX   12.39  FEB 10.00  NSY NB 0.45 48    9.55  42   3.4%  10.8%
OSIP   33.42  FEB 25.00  GHU NE 0.80 172  24.20  42   2.4%   7.7%
ERES   30.70  FEB 27.50  UDB NY 0.95 4    26.55  42   2.6%   6.9%
THER   20.23  FEB 17.50  UKT NW 0.55 40   16.95  42   2.3%   6.7%
SWIR   21.45  FEB 17.50  IYQ NW 0.40 17   17.10  42   1.7%   5.8%
DITC   20.60  FEB 15.00  QZD NC 0.35 202  14.65  42   1.7%   5.7%
PMCS   21.33  FEB 17.50  SQL NW 0.40 712  17.10  42   1.7%   5.7%
BLTI   18.74  FEB 15.00  BQF NC 0.30 56   14.70  42   1.5%   5.4%
NVDA   25.47  FEB 22.50  UVA NX 0.55 2237 21.95  42   1.8%   5.1%
RMBS   35.20  FEB 25.00  BNQ NE 0.50 4617 24.50  42   1.5%   4.8%


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


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

A Necessary Correction!
By Ray Cummins

Stocks slumped Friday as investors used a disappointing labor
report as a catalyst for profit-taking.

The Dow Jones industrial average fell 133 points to 10,458 on
weakness in telecom components SBC Communications (NYSE:SBC)
and AT&T (NYSE:T).  The technology-laden NASDAQ Composite slid
13 points to 2,086 as semiconductor shares retreated in force.
The S&P 500 Index lost 10 points to 1,121 amid selling pressure
in aluminum, transportation, insurance, hospital, restaurant,
and brewery shares.  Despite the drop, all three major averages
rose during the week.  The Dow ended 0.5% higher, the S&P 500
gained 1.2% and the NASDAQ climbed 4%.  Volume was heavy, with
about 1.66 billion shares changing hands on the New York Stock
Exchange, where advancers and decliners were roughly equal.  On
the NASDAQ, almost 2.5 billion shares traded with losers pacing
winners 3 to 2.  Treasury prices closed at recent highs, with
the ten-year note up 1 12/32, yielding 4.08%.

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

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


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

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

CME     70.63   75.30   JAN   60  65   0.50  64.50   0.50   Open
NCEN    39.62   40.41   JAN   30  32   0.45  32.93   0.45   Open
SII     40.22   44.07   JAN   35  37   0.25  37.25   0.25   Open
CYBX    32.70   34.28   JAN   25  30   0.50  29.50   0.50   Open
INTU    52.16   48.80   JAN   45  47   0.25  47.25   0.25   Open
TRN     31.36   30.93   JAN   25  30   0.75  29.25   0.75   Open
AA      37.30   37.25   JAN   32  35   0.30  34.70   0.30   Open
MTH     65.37   62.08   JAN   55  60   0.45  59.55   0.45   Open
NFLX    51.07   62.00   JAN   40  42   0.25  42.25   0.25   Open
SCHN    59.28   53.62   JAN   45  50   0.55  49.45   0.55   Open
SINA    37.90   40.65   JAN   30  35   0.60  34.40   0.60   Open
SOHU    32.70   34.37   JAN   25  30   0.65  29.35   0.65   Open
YHOO    45.40   48.12   JAN   40  42   0.25  42.25   0.25   Open

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

Meritage (NYSE:MTH), Intuit (NASDAQ:INTU), Trinity Industries
(NYSE:TRN) and Schnitzer Steel (NASDAQ:SCHN) are on the "watch"
list.


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

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

CERN    39.22   38.59   JAN   50  45   0.55   45.55   0.55   Open
MDC     64.06   62.43   JAN   70  65   0.60   65.60   0.60   Open
CL      49.19   50.49   JAN   55  50   0.65   50.65   0.16   Open?
KLAC    55.55   60.81   JAN   65  60   0.55   60.55  (0.26) Closed
CTX    104.40  101.70   JAN  115 110   0.50  110.50   0.50   Open
IACI    33.26   32.18   JAN   37  35   0.25   35.25   0.25   Open
RYL     85.08   74.00   JAN   95  90   0.45   90.45   0.45   Open

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

KLA-Tencor (NASDAQ:KLAC) became an "early-exit" candidate Friday,
when the issue traded above its recent lateral range at a 52-week
high.  The bearish position in Research in Motion (NASDAQ:RIMM)
has previously been closed for a loss.  Clorox (NYSE:CL) is on the
"watch" list.


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

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

OSX     89.45  98.50   JAN   80  85   4.40   84.40  0.60   Open
ACDO    31.77  31.86   JAN   25  30   4.40   29.40  0.60   Open
IMCL    40.76  38.85   JAN   30  35   4.50   34.50  0.50   Open
MCHP    32.90  34.35   JAN   25  30   4.40   29.40  0.60   Open
ATRS    36.84  35.39   JAN   30  35   4.45   34.45  0.55   Open?

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

The bullish debit-spread in Digital River (NASDAQ:DRIV), which has
previously been closed by conservative traders, is now profitable.
Altiris (NASDAQ:ATRS) slumped late in the session Friday and any
further downside movement would suggest an early exit in the play.


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

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

SYMC    32.42  35.99  JAN   37  35   2.15   35.35 (0.64) Closed
AMZN    51.90  51.59  JAN   60  55   4.45   55.45  0.55   Open

Our "watch-list" position in Symantec (NASDAQ:SYMC) was closed
when the issue moved above resistance near the sold (call) strike
at $35.


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

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

IDCC    19.00  24.46   JAN     25     15     0.20    0.40   Open?
NE      36.09  38.19   JAN     37     35     0.10    0.80   Open?
PTEN    31.34  33.85   JAN     32     30    (0.10)   1.75   Open?
UTHR    23.20  23.08   MAY     30     17    (0.10)   0.10   Open

Patterson-UTI Energy (NASDAQ:PTEN) has already reached the target
gain and Noble (NYSE:NE) achieved a favorable "early-exit" profit
in less than one week.


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

No Open Positions


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

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

CEPH    46.34  52.50   FEB-50C   JAN-50C   0.70    1.05   Closed
FISV    38.28  38.73   MAR-35P   JAN-35P   0.70    0.60    Open
XMSR    26.80  27.50   FEB-30C   JAN-30C   0.85    1.15    Open?

As noted last week, the bullish position in Cephalon (NASDAQ:CEPH)
achieved maximum profit with the issue near the sold strike at $50
and conservative traders could have closed the position for a nice
gain during Tuesday's rally.  The new play in XM Satellite Radio
(NASDAQ:XMSR) offered a favorable "early-exit" profit after only
three days in the position.


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

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

ATN     17.93  18.27   JAN    17    17     2.40    2.75   Closed
ACL     59.19  59.45   JAN    60    60     3.00    2.80    Open?
MATK    65.74  65.90   MAR    65    65     9.40    9.00    Open

The straddle on Mylan Labs (NYSE:MYL) has been previously closed
for a small loss.


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

No Open Positions


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

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

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

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

*****
LRCX - Lam Research  $34.59  *** Chip-Equipment Specialist! ***

Lam Research Corporation (NASDAQ:LRCX) designs, manufactures,
markets and services semiconductor processing equipment used in
the fabrication of integrated circuits.  The company's products
are currently used in the front-end of the wafer processing
manufacturing cycle: etch, CMP, and post-CMP clean.  Lam's unique
family of etch systems incorporates plasma technologies designed
to meet both current and future needs.  The company offers both
200-milimeter and 300-milimeter Teres CMP integrated polishing
and cleaning systems with Linear Planarization Technology (LPT),
which uses a high-speed belt instead of the rotating table used
in conventional polishers.  The company also provides the Synergy
Integra, which incorporates advanced cleaning technology with a
platform that integrates polisher and cleaner.

LRCX - Lam Research  $34.59

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-25.00  LMQ-NE  OI=78   ASK=$0.20
SELL PUT  FEB-30.00  LMQ-NF  OI=648  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$29.45


*****
OHP - Oxford Health  $46.69  *** New Trading Range? ***

Oxford Health Plans (NYSE:OHP) is a healthcare company providing
health benefit plans in New York, New Jersey and Connecticut.  The
company's product line includes its point-of-service plans, the
Freedom Plan and the Liberty Plan, health maintenance organizations,
preferred provider organizations, Medicare+Choice plans and also
third-party administration of employer-funded benefit plans.  The
company offers its products through its HMO subsidiaries and also
through Oxford Health Insurance, a health insurance subsidiary.

OHP - Oxford Health  $46.69

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-40.00  OHP-NH  OI=334  ASK=$0.45
SELL PUT  FEB-42.50  OHP-NV  OI=552  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$42.20


*****
NBR - Nabors Industries  $44.11  *** Strong Sector! ***

Nabors Industries (NYSE:NBR) operates in two primary business
segments within the oilfield services industry, contract drilling
and manufacturing and logistics.  The company provides drilling,
workover, well-servicing and related services on land and offshore
in the lower 48 states of the United States (lower 48 states),
Canada and Alaska, as well as international markets.  The company
also manufactures and leases (or sells) top drives, drilling
instrumentation systems and rig-reporting software domestically
and internationally, and provides oil rig construction, logistics
services and marine transportation and support services in Alaska
and the lower 48 states.

NBR - Nabors Industries  $44.11

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-37.50  NBR-NU  OI=103  ASK=$0.25
SELL PUT  FEB-40.00  NBR-NH  OI=427  BID=$0.50
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=12% B/E=$39.70


*****
ADBE - Adobe Systems  $37.12  *** Sell-Off In Progress! ***

Adobe Systems (NASDAQ:ADBE) offers a line of software products that
allow consumers, businesses and creative professional customers to
create, manage and deliver visually rich, compelling and reliable
content.  Adobe has four business segments: Creative Professional,
which provides software for professional page layout, professional
Web page layout, technical document and business publishing; Digital
Imaging and Video, which provides users with software for creating,
editing and enhancing digital images and photographs, digital video,
animations, graphics and illustrations; ePaper Solutions, which
provides electronic document distribution software that allows users
to create, enhance, annotate and securely send Adobe PDF files that
can be shared, viewed, navigated and printed, and OEM PostScript and
Other, which includes printing technology to create and print simple
or visually rich documents with precision.

ADBE - Adobe Systems  $37.12

PLAY (less conservative - bearish/credit spread):

BUY  CALL  FEB-45.00  AEQ-BI  OI=879  ASK=$0.20
SELL CALL  FEB-40.00  AEQ-BH  OI=559  BID=$0.75
INITIAL NET-CREDIT TARGET=$0.60-$0.65
POTENTIAL PROFIT(max)=14% B/E=$40.60


*****
TBL - Timberland  $51.13  *** In A Trading Range? ***

Timberland (NYSE:TBL) is a global leader in the design, engineering
and marketing of premium-quality footwear, apparel, and accessories
for consumers who value the outdoors and their time in it.  The
company's products offer quality workmanship and detailing and are
built to withstand the elements of nature.  They can be found in
leading department and specialty stores as well as Timberland-brand
retail stores throughout North America, Europe, Asia, Latin America,
and the Middle East.

TBL - Timberland  $51.13

PLAY (less conservative - bearish/credit spread):

BUY  CALL  FEB-60.00  TBL-BL  OI=149  ASK=$0.30
SELL CALL  FEB-55.00  TBL-BK  OI=220  BID=$0.95
INITIAL NET-CREDIT TARGET=$0.65-$0.75
POTENTIAL PROFIT(max)=15% B/E=$55.65


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

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

*****
BRCM - Broadcom  $36.78  *** Next Leg Up? ***

Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated
silicon solutions that enable broadband communications and the
networking of voice, video and data services.  Using proprietary
technologies and advanced design methodologies, Broadcom designs,
develops and supplies complete system-on-a-chip solutions and
related hardware and software applications for all broadband
communications markets.  Their diverse product portfolio includes
solutions for digital cable and satellite set-top boxes; cable
and DSL modems and residential gateways; high-speed transmission
and switching for local, metropolitan, wide area and storage
networking; home and wireless networking; cellular and terrestrial
wireless communications; Voice over Internet Protocol (VoIP)
gateway and telephony systems; broadband network processors; and
SystemI/O(TM) server solutions.

BRCM - Broadcom  $36.78

PLAY (conservative - bullish/debit spread):

BUY  CALL  FEB-30.00  RCQ-BF  OI=785   ASK=$7.30
SELL CALL  FEB-32.50  RCQ-BZ  OI=1368  BID=$5.10
INITIAL NET-DEBIT TARGET=$2.15-$2.20
POTENTIAL PROFIT(max)=14% B/E=$32.20


*****
MIK - Michael's Stores  $41.42  *** Retail Sector Slump! ***

Michaels Stores (NYSE:MIK) is an arts and crafts specialty retailer
providing materials, ideas and education for creative activities.
The firm operates over 700 Michaels retail stores in 48 states, as
well as in Canada, offering a products for the do-it-yourself home
decorator and arts and crafts supplies.  The company also operates
over 150 Aaron Brothers stores in nine states, with photo frames,
a full line of ready-made frames, custom framing services and a
wide selection of art supplies.  In addition, the company owns and
operates Star Wholesale, a single-store wholesale operation located
in Dallas, Texas, offering merchandise primarily to interior
decorators/designers, wedding/event planners, florists, hotels,
restaurants and commercial display companies.

MIK - Michael's Stores  $41.42

PLAY (conservative - bearish/debit spread):

BUY  PUT  FEB-47.50  MIK-NT  OI=10  ASK=$6.50
SELL PUT  FEB-45.00  MIK-NI  OI=23  BID=$4.30
INITIAL NET-DEBIT TARGET=$2.15-$2.20
POTENTIAL PROFIT(max)=14% B/E=$45.30


*******************
SYNTHETIC POSITIONS
*******************

These stocks have momentum-based trends and favorable option
premiums.  Traders with a directional outlook on the underlying
issues may find the risk-reward outlook in these plays attractive.

*****
CEPH - Cephalon  $52.50  *** New Trading Range? ***

Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm
dedicated to the discovery, development and marketing of products
to treat sleep disorders, neurological disorders, cancer and pain.
In addition to conducting a very active research and development
program, the company markets three products in the United States
and a number of products in various countries throughout Europe.
Cephalon's United States products are comprised of Provigil, for
the treatment of excessive daytime sleepiness associated with
narcolepsy, Actiq for cancer pain management, and Gabitril for
the treatment of partial seizures associated with epilepsy.

CEPH - Cephalon  $52.50

PLAY (speculative - bullish/synthetic position):

BUY  CALL  FEB-60.00  CQE-BL  OI=729   ASK=$0.60
SELL PUT   FEB-45.00  CQE-NI  OI=1773  BID=$0.60
INITIAL NET-CREDIT TARGET=$0.10-$0.15
INITIAL TARGET PROFIT=$0.75-$1.10

Note: Using options, this position is similar to being long the
stock.  The minimum initial margin/collateral requirement for
the sold option is approximately $1400 per contract.  However,
do not open this position if you can not afford to purchase the
stock at the sold put strike price ($45.00).


*****
EYE - Visx  $25.30  *** Cheap Speculation! ***

Visx (NASDAQ:EYE) is engaged in the development of proprietary
technologies and systems for laser vision correction.  Laser
vision correction relies on a computerized laser system to treat
nearsightedness, farsightedness and astigmatism with the goal of
eliminating or reducing reliance on eyeglasses and contact lenses.
The company's Excimer Laser System (the Visx System) ablates or
removes submicron layers of tissue from the surface of the cornea
to reshape the eye, thereby improving vision.  The Visx system
also treats certain types of corneal pathologies in an outpatient
procedure known as PhotoTherapeutic Keratectomy.  The company's
significant customers include Laser Vision Centers, and TLC Laser
Eye Centers.

EYE - Visx  $25.30

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  MAR-30.00  EYE-CF  OI=468  ASK=$0.45
SELL PUT   MAR-20.00  EYE-OD  OI=476  BID=$0.25
INITIAL NET-DEBIT TARGET=$0.00-$0.10
INITIAL TARGET PROFIT=$0.35-$0.60

Note: Using options, this position is similar to being long the
stock.  The minimum initial margin/collateral requirement for
the sold option is approximately $550 per contract.  However,
do not open this position if you can not afford to purchase the
stock at the sold put strike price ($20.00).


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

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

*****
PTR - PetroChina  $54.08  *** A Volatile Issue! ***

PetroChina (NYSE:PTR) is engaged in petroleum-related activities,
including the exploration, development, production and sale of
crude oil and natural gas; the refining, transportation, storage
and marketing of crude oil and petroleum products; the production
and sale of common petrochemical products, derivative chemical
products and other chemical products, and the transmission of
crude oil, refined products and natural gas, as well as sale of
natural gas.  Substantially all of its total estimated proved oil
and natural gas reserves are located in China, principally in
northeastern, northern, southwestern and northwestern China.

PTR - PetroChina  $54.08

PLAY (speculative - neutral/debit straddle):

BUY CALL  FEB-55.00  PTR-BK  OI=356  ASK=$3.50
BUY PUT   FEB-55.00  PTR-NK  OI=211  ASK=$4.20
INITIAL NET-DEBIT TARGET=7.30-$7.50
INITIAL TARGET PROFIT=$2.40-$3.15


*****


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

Bears Come Out of Hibernation
by - Nich Sheldon

Well, well, well... what a bearish turn of events.  A quick look
at the scoreboard and we see Bears leading the pack 21 to 6.
While the scoreboard is bleeding red, only seven of the indexes
lost more than one percent.

The INDU Dow Jones Industrial Average lost -1.26 percent today,
falling 133.55 points and failing to break over strong resistance
at 10600.  The index actually closed under its 10-DMA for the
first time since November 21st.  This leads us to wonder whether
or not we're going to see further confirmation of this breakdown
throughout next week?

The OEX S&P 100 index has been climbing higher in a very narrow
range. Friday's drop doesn't even bring the index back to its 10-
dma, so we've yet to see true weakness here.

The TRAN Dow Jones Transportation Index collapsed through its 10-
DMA today, losing -1.34 percent.  The TRAN is approaching support
at its rising 40 and 50-dma's, where the index has bounced in the
past.  Until it breaks the 50-dma the trend is still up.

The fire that was lit under the DDX Disk Drive Index simmered down
a bit today, as the index dropped -1.22 percent.  The 20-point
gain in the past five sessions made the index far to overextended
to break over its strong resistance at 144.  The group looks
poised for more profit taking and the next support level is near
135.

The recent breakout over 256 for the GHA GSTI Hardware Index had
bulls jumping at the thought of higher highs.  But the GHA found
difficulty breaking over 265 today, as it lost half of Thursday's
gains by market close.  Look for any profit taking to bring the
group back toward old resistance near 256.

The XAL Airline Index met some turbulence today, dropping -2.26
percent and closing right between the 10 and 50-DMA, which are
resting at 62.  The XAL has just returned to neutral territory
from overbought territory on the Stochastics indicator.  It would
not surprise us to see more selling in this group and a test of
support in the 59-60 levels is the area to watch.

The NWX Networking Index tried as hard as its little overextended
legs could run to make today the tenth consecutive day of gains,
but bears overturned the index, retracing half of yesterdays gains
and pushing the NWX to drop -1.14 percent by the closing bell.  It
seems that support in November of 2001-January 2002 (294) was hard
resistance on Friday.

There were a few indexes that ended higher on Friday, but only a
couple of them claimed noteworthy gains.  The OSX Oil Service
Index struck oil today, gushing higher by +3.74 percent.  The OSX
almost broke the 100 level.  If you look at the chart you might
see some strange volatility.  It looks like there were some bad
ticks early in the session and again very late in the day with
readings near the 90 level.

The DJUSHB DJ US Home Construction Index finally received some
relief from bulls.  The +2.68 percent gain in the index was a
continuation of Thursday's afternoon rebound but the group remains
under its 50-dma.


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

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