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Daily Newsletter, Monday, 01/12/2004

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The Option Investor Newsletter                   Monday 01-12-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Earnings Eagerness
Futures Wrap: Chop & Churn
Index Trader Wrap: Bullish rotation builds, with Internets breaking out


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     01-12-2004            High     Low     Volume Advance/Decline
DJIA    10485.18 + 26.29 10491.63 10444.15 2.84 bln   1735/1115
NASDAQ   2111.78 + 24.86  2112.52  2085.15 2.27 bln   2061/1050
S&P 100   559.41 +  2.86   559.61   556.22   Totals   3796/2165
S&P 500  1127.23 +  5.37  1127.85  1120.90
RUS 2000  583.01 +  7.81   583.01   575.20
DJ TRANS 3019.28 + 30.34  3023.20  2987.79
VIX        16.82 +  0.07    17.46    16.79
VXO        16.25 +  0.31    17.05    16.17
VXN        22.56 -  0.45    24.26    22.45
Total Volume 4,495M
Total UpVol  3,245M
Total DnVol  1,183M
52wk Highs     915
52wk Lows       13
TRIN          1.01
PUT/CALL      0.79
*******************************************************************

Earnings Eagerness
by James Brown

Once again tech stocks lead the rally as investors eagerly await
the Q4 earnings season to hit full swing.  Consensus estimates
are for a 20% to 22% jump in quarterly earnings and it is this
strong level of optimism that helped the markets weather such an
abominable jobs report last Friday.  The NASDAQ closed Monday
with a 1.19% gain settling at 2111.  The Dow Jones Industrials
added just 26 points or 0.25% to close at 10485 and the S&P 500
inched up 5 points.  Backing up the NASDAQ's gains was strong
buying across the various tech sectors with internets,
semiconductors and networking issues drawing the most interest
all of which were up more than three percent.

European markets were generally lower on the session as the
dollar managed some meager gains against the euro and the British
pound despite hitting new lows intraday.  The Japanese markets
were closed for a holiday.  I did notice that the gold and silver
index was down 1.65% even though February gold futures were only
off 20 cents to $426.60 an ounce.  As a matter of fact silver hit
new six-year highs with an intraday peak of $6.71 an ounce before
closing at $6.617.  Recent discussion in the rise of silver
suggest a strong part of the metal's rally is being driven by the
global economic recovery.  Of course that recovery may begin to
stumble if oil doesn't halt its current climb.  Crude oil rose
another 41 cents to $34.72 a barrel on Monday.

Investors have a right to feel cautious given the overextended,
way-overdue-for-a-pullback conditions in the major indices but
the market internals today were very bullish.  There were 17
advancers for every 11 decliners on the NYSE and winners had a 2
to 1 edge over losers on the NASDAQ.  New highs hit 815 compared
to just 16 new lows on the two exchanges.  Overall volume was
decent but more importantly up volume was nearly twice down
volume on the NYSE and more than four times down volume on the
NASDAQ.  I will note that the volatility indices added to
Friday's gains but that might be explained by this Friday's
triple-witching expiration and some increased put buying from
investors seeking to protect positions from any earnings
disasters.

Chart of the DJIA:



Chart of the NASDAQ:



As is typical during any earnings week there were plenty of story
stocks but some of the bigger headlines were produced by broker
ratings.  Merck & Co (MRK), a Dow component, was the second worst
performer in the $INDU losing 2.6% to close at $45.90.  The drop
was spurred by bearish comments from Credit Suisse First Boston
who downgraded the stock from "neutral" to "under perform".  The
CSFB analyst felt the company's estimates were too optimistic for
its domestic sales and a pipeline with not enough new candidates.
This put pressure on the DRG drug index, which marked its third
day of losses.

CSFB wasn't so critical of Merck's rival Bristol-Myers Squibb
(BMY).  The broker raised their rating from "under perform" to
"neutral" believing BMY is better positioned for growth with a
number of drugs currently in development.  Another drug company
making news is Dendreon (DNDN), which soared 25% to $11.44.  DNDN
offered very promising results from its Phase III trials on
Provenge, a treatment for patients with advanced prostrate
cancer.  The report unveiled an 89% success rate in increased
survival time for those patients with less aggressive forms of
the disease (Reuters).  The company expects to complete its
current Phase III trials in late 2004 to early 2005 and hopes to
get Provenge on the market in 2005.  At least one analyst firm
followed up the news with a "strong buy" for DNDN.

We can blame broker ratings for the best and worst performers in
the Dow Jones Industrials today as well.  The worst performer was
Alcoa (AA), which closed down 3.4% to $35.97.  A Prudential
analyst cut the stock to an "under weight" from "neutral weight"
claiming that aluminum prices would likely fall and AA would
probably miss its 2004 and 2005 estimates.  Meanwhile the best
performing Dow component was Caterpillar (CAT).  CAT turned out a
2.48% gain bouncing strongly from its $80 level of support after
Merrill Lynch raised their Q4 earnings estimates.  We'll get to
hear CAT's results on January 23rd.

Odds are that tomorrow will bring more of the same.  An after the
bell earnings pre-announcement tonight by StorageTek (STK) should
keep tech stocks in the spotlight.  STK believes that profits
will surpass 55 cents a share on revenues of more than $650
million for the quarter.  Analysts had been looking for 50 cents
a share on just $603 million.  The stock was trading sharply
higher in after-hours markets and this news could easily fan the
flames for the rally in disk drives, storage and hardware stocks.

Economists will also be looking for the latest data on import and
export prices for December tomorrow morning but these reports are
rarely market-moving events.  Wednesday is another story with the
PPI for December, the trade balances for November and the Fed's
Beige Book report.  We'll also be hearing plenty of chatter about
the major earnings announcements due out the rest of the week.
Wednesday brings us Delta Airlines (estimates -1.67/share), Apple
(estimates +14 cents/share), Intel (estimates +28 cents/share)
and Yahoo! (estimates 11 cents/share).  Thursday we'll hear from
Sun Microsystems (estimates -0.04 cents/share) and Bank of
America (estimates +1.77/share).  Before the bell on Friday we'll
hear from General Electric who is expected to turn in 45 cents a
share.

Trade carefully.  Investors are holding stocks with the
expectation that earnings will be a blow out.  Even if they
deliver on the fourth quarter numbers if companies fail to guide
higher it could be a painful run for the exits.


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

Chop & Churn
Jonathan Levinson

The US Dollar Index fell to new multiyear lows overnight and then
bounced, while equities traded in a very narrow, movement-free
range until the final hour of trading, at which point synchronous
short cycle and 30 minute upphases finally caught traction and
sent prices to their session highs.  Gold retreated while silver
and treasuries advanced.


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.

Daily chart of the US Dollar Index



The US Dollar Index broke to new bear market lows at 84.80
overnight before bouncing to 85.58 as of this writing.  February
gold reached a high of 429.90 and March silver a new six year
high at 6.725 before the dollar correction began.  I've zoomed
out from the usual 10 minute chart to view the daily candles on
the USD Index future, which is trending on the daily and weekly
oscillators.  I continue to see the current dollar weakness as
the key to the bull markets in US-denominated equities and
commodities, and the buzz in the trading community was that the
BoJ intervened in support of the USD to the tune of $38B last
week alone.  That's not a typo.


Daily chart of February gold


February gold traded against the dollar today, rallying as it
fell and falling as it rose, reaching a low of 422.90 and a high
of 429.90 in the early morning.  The selling in gold caused a
weak twitch on the daily cycle oscillators but tested neither
upper nor lower wedge trendlines in the rising bear wedge.  The
metal remains in a strong upphase, just as the dollar is in a
trending downphase.  Support has moved up to 422, followed by
412, 405 and 400, resistance from 430-434.  Gold finished lower
by 1.90 at 425.10, silver +.118 at 6.615, XAU -1.66% at 108.71
and HUI -1.72% at 244.45.  The CRB closed at a multiyear high of
269.73, up 1.96 on strength in corn, soybeans, wheat and coffee
futures.


Daily chart of the ten year note yield


Ten year treasuries opened strong and softened throughout the
session, closing near their session lows, with ten year note
yields (TNX) bouncing to close lower by just 0.3 bps at 4.083%.
Despite the bounce at lower daily Bollinger support (currently
4.063%), the daily cycle remains in a downphase, and next
significant support is in the 4% area.  The Fed added 6.5B via
overnight repos, which combined with the 2.25B expiring reverse
repo resulted in a net addition of 8.75B worth of liquidity to
the Fed's 22 dealers.  The very small rise in treasuries was
surprising in that regard, as I would have expected more of a
move with that kind of money added.


Daily NQ candles


The NQ added 24 points or 1.58% to finish at 1545.50.  Trim off
the last half hour and the session would have looked quite
different, as there was very little movement for most of the
session.  An early morning continuation of Friday's young 30
minute cycle downphases resulted in a sideways move, and the
following upphase went nowhere either until that last half hour.
Despite the impressive gain for the day, the 10 day stochastic
left off on a bearish kiss while the Macd continues its moonshot.
Pricewise, the NQ respected the upper band of the rising flag,
never testing the lower rising support line.  1518, followed by
1496 are key support, with 1543 and 1548 upside resistance.


30 minute 20 day chart of the NQ


It looked like a textbook head and shoulders top printing above
the 1518 neckline, and everything, including the intraday cycle
configuration, looked good to go until that recalcitrant half
hour changed everything.  This rally has been paved on bear wedge
and head and shoulder failures, and this afternoon gave us yet
another.


There's first support at 1530-33, roughly where the left and
right shoulders were printing their peaks, followed by 1518.  The
300 minute stochastic wasted most of its upside energy during the
rangebound drift of the early and mid-afternoon, and the end of
day buying panic looked and felt like the terminal move of that
cycle.  Both the short cycle and the 30 min are in topping
territory, and, given the double top above 1540, any weakness
tomorrow morning should be sufficient to kick off the next 30
minute cycle downphase.  With the daily cycle above so toppy and
trying to roll, the current chop above 1518 smacks of top-
building.  We won't know until 1518 breaks, but if it does, then
that should confirm the new daily cycle downphase and clear the
wave for a quick trip to 1496.  If, on the other hand, 1550
breaks on a closing basis, then the daily cycle will begin
trending, and we'll have to reevaluate.



Daily ES candles


The ES was higher by 8.25 points or .74% to close at 1128.25,
trading weaker than the NQ and closing at a lower high.  The 1118
level held as support today, and the upper rising channel
trendline was not tested.  The daily cycle oscillator appears to
be trying to print a top, but there's no telling how much
churning the ES could do before it actually rolls over.  Until
support in the 1105 area breaks, we won't know, but a break below
1118 should be sufficient to generate an actual sell signal on
this timeframe.  Bollinger resistance is up at 1139.50, but I
expect to see channel resistance at 1133 before then.  Given the
toppiness in the daily cycles, 1133 should not be exceeded.


20 day 30 minute chart of the ES


The cycle picture on ES is the same as on NQ, except that the
price got less traction throughout the session.  A broad, lazy
head and shoulders is still possible here, but price should not
break above the rising trendline.  Note that Bollinger resistance
on this timeframe is at 1127, and the 300 minute stochastic is in
overbought territory.  Any weakness at the open should commence
the next downphase, targeting 1118 support, below which 1106 is
the target implied by the head and shoulders formation.


150-tick ES


On the intraday ES, you're looking at a 5 point range until the
last hour.  The grey horizontal lines are volume-by-price.  The
short cycle oscillators were buried in overbought at the close,
and bulls will be pushing uphill here to generate new highs
tomorrow morning.  This is a timeframe that trends in overbought
or -sold quite easily, but it currently favors a correction from
here.


Daily YM candles


The YM added 48 points or .46% to close at 10482 and was the
weakest equity future.  The bounce came right from rising channel
support in the 10440 area.  The daily cycle has rolled over and
is just beginning its downphase.


20 day 30 minute chart of the YM


Nothing to add here, with my highlights of key support.  A break
below 10470 implies a head and shoulders target of 10340.

Whether today was the type of churning that often accompanies
cycle tops or just another pause in a so-far iron-clad uptrend
will have to be seen tomorrow.  With the short cycle, 30 minute
and daily cycles all at or spitting distance from relative tops,
the good news is that we'll find out if the market has at last
become permanently immune to gravity or not.  With the dollar
trying to put in yet another bottom, we remain close to a key
intermarket pivot point.  Just as the weakening dollar has seen
equities and commodities rally relentlessly, so may a rising
dollar bring the reverse.  We do not know whether such will be
the case, but I'm anxious to find out.


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

Bullish rotation builds, with Internets breaking out

The very broad NASDAQ Composite (COMPX) 2,111.78 +1.19% closed at
a 52-week high for the fifth time in six sessions after taking a
breather Friday afternoon, as market participants eagerly await
quarterly earnings from semiconductor giant Intel (NASDAQ:INTC)
$34.15 +0.52% and Internet conglomerate Yahoo! Inc. (NASDAQ:YHOO)
$49.74 +3.36% Wednesday afternoon.

The CBOE Internet Index (INX.X) 182.33 +3.5% was just the latest
technology-related sector to exhibit signs of bullish rotation
taking place, after digesting gains in prior weeks.  RealNetworks
(NASDAQ:RNWK) $6.69 +9.3%, Juniper Networks (NASDAQ:JNPR) $23.72
+7.8%, InfoSpace (NASDAQ:INSP) $24.86 +5.11% and DoubleClick
(NASDAQ:DCLK) $11.12 +4.9% and Check Point Software (NASDAQ:CHKP)
$18.88 +4.02% round out the INX.X top 5 percentage gainers, with
InterActive Corp. (NASDAQ:IACI) $32.27 +0.27% bringing up the
rear of 13:0 positive breadth.

CBOE Internet Index (INX.X) - Weekly Intervals



The INX.X looks to extend last weeks break higher from a nice 12-
week base of congestion and moves above the mid-point of a
bullish regression channel, where bullish resistance not unlike
what the Dow Industrials (INDU) 10,485 +0.25% are currently
testing, looks to have the INX.X making way to the 200 level in
coming weeks.  I've shown a relative high of 188.87 dating back
to 2001, but we've found old relative highs serve more as near-
term gravitational points than any type of resistance.

CBOE Internet Index ($INX.X) components (AMZN, CHKP, CSCO, DCLK,
EBAY, ELNK, IACI, INSP, JNPR, MNST, RNWK, TWX, YHOO).

Market Snapshot / Internals - 01/12/04 Close



As the CBOE Internet Index (INX.X) approaches its July 2001
relative highs, the broader NASDAQ Composite (COMPX) 2,111.78
+1.2% shows resiliency at the 2,100 level, where 2,005 was the
COMPX's July 2001 highs.  Market internals showed a bullish A/D
line all day, and built gradually more bullish toward the close.

Pivot Matrix -



With this being option expiration week, I grow a bit suspicious
yet again of any option activity we might pick up on to sense
direction near-term.  One item I'm noting is tomorrow's DAILY
Pivot of 1,125.33 in the SPX, where today, option action shows we
may be seeing some option-related rollover to March contracts
from the 1,125 January strikes.  I'm alert again for the "sell
the puts" and "buy the calls" trade we've been picking up on in
recent weeks, but today's Market Volatility Index (VIX.X) 16.82
+0.41% and fractional 0.07 point move gives little tell, or hint
as to potential institutional bias.  Still, with the SPX session
low holding above its WEEKLY pivot of 1,120.75, traders might
want to have a close eye on the Jan. and March 1,125 option
strikes tomorrow, using a sharp VIX.X move of 2% or more as a
heads up for institutional action, where the path of least
resistance would still suggest higher prices.

S&P 500 Index (SPX.X) Option Chain - Sorted by volume



I've sorted my QCharts SPX option chain by volume and we can see
that the March and January 1,125 strikes were all the most
actively traded.

Based on HL Camp & Company's buy/sell program premium levels, I
counted 19 buy program premium alerts at $-0.54 and zero sell
program premium alerts at $-2.14.  It wasn't until just before
today's close that the SPX.X 1,127.23 +0.47% really showed any
move above the 1,125 level, but this action gives hint that with
a sharp decline in the VIX.X tomorrow, should we see the SPX Jan.
1,125 puts lead the most active volume, limited overhead supply
of stock could bring a powerful rally into Thursday's index
expiration.

S&P 500 Index (SPX.X) Chart - Daily Intervals



First sign of any "weakness" I might see in the SPX is a decline
back below the WEEKLY Pivot in the SPX, and today's lows came
just shy.  I've pointed to the 12/15/03 bar on the above chart,
which marked the Monday prior to December's index expiration,
where we did a pretty good job sniffing out some bullish
institutional activity in the options market after a "key
reversal day" of 12/15/03.  It wasn't until the 12/17/03 Index
Wrap that we sniffed things out, and by my count, I'm a day early
in tonight's comments.  Easy trade here and if another bullish
unwinding is about to take place, the SPX shouldn't violated
today's lows, or the WEEKLY Pivot, and if institutions start
selling 1,125 puts and buying out the money calls, the VIX.X
should drop like a rock and a bullish move above SPX 1,133 could
see another wave higher to 1,144.

Financials traded mixed today with the Brokers (XBD.X) 677.75
+1.04% and Insurance (IUX.X) 311.59 +1.25%, while the S&P Banks
Index (BIX.X) 336.80 -0.06% and KBW Bank Index (BKX.X) 976.23
-0.01% traded relatively unchanged.  The BIX.X traded a double
top 52-week high of 343.82 and 343.81 on December 31 and January
2, and now test their rising 21-day SMA.  Friday's high of 340.11
found sellers, but I've got an upside alert set there, and one
thing BEARS don't want to see is the banks to rebound, from what
looks to be "oversold" levels relative to the SPX/OEX.

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



I've left the OEX's 05/17/02 relative highs of 553 on the above
chart to simply show that "resistance" levels that are horizontal
in nature may not necessarily be providing as much resistance and
some bears think they do, as not that many old bulls still hold
stock from those levels.  With the OEX having pierced above its
MONTHLY R1 last week (Thursday), this hints near-term anyway,
that there may not have been too much institutional computer
selling at that level.  First sign of weakness might well be
viewed as the 553 level.

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



Ugh!  The QQQ hasn't traded below a prior days low in six
sessions, and the WEEKLY Pivot begins to look like near-term
support.  After-hours trade is $38.40 and somebody seems eager to
buy.  If Q's jump out of our bullish wedge, further short
covering could build to WEEKLY R2.

Dow Industrials Chart (INDU) - Daily Intervals



The INDU continue to show some lag compared to the other major
indices, and a rising 21-day SMA closes in on price action.  A
spike to 10,650 would take INDU out of its channel where multiple
levels of pivot matrix reside.  Right now, as long as INDU hangs
around 10,500, it provides positive psychology to market
participants.

Jeff Bailey


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The Option Investor Newsletter                   Monday 01-12-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: YHOO
Dropped Calls: None
Dropped Puts: None
Play of the Day: See Note
Watch List: A Few More Bullish Candidates
Market Posture: See Note


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OCO Stop & Profit Orders                        OneStopOption
All types of Spreads and Buy Writes             888-281-9569
Auto-Trade Market Monitor Signals
Personal Service and Education


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

Call - YHOO
Raised stop from 46.25 to 49.00


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

None


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

None


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***************
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.


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Brokerage Group, addressing the demand for personalized,
experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
and Alan Knuckman specialize in live assistance of stock*,
option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

Live Broker and Online Trading Available     888-281-9569

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

A Few More Bullish Candidates

Mentor Graphics - MENT - close: 17.41 change: +0.47

WHAT TO WATCH:  Technology bulls will want to be watching MENT.
The stock recently broke out of its four-month old descending
channel while also breaking out above its simple 200 and 50-
dma's.  The stock also got a boost after the company pre-
announced better than expected revenues for this upcoming
earnings announcement in late January.  The intraday chart
suggests that MENT might be in a bull flag consolidation pattern.
Look for a move above $17.75 or $18.00 as a potential trigger to
go long.

Chart=


---

Harman Intl Industries - HAR - close: 76.00 change: +2.78

WHAT TO WATCH:  One of the biggest winners in 2003 was HAR.
Known for its high quality audio-visual equipment the company's
stock appears to be under constant buying pressure.  Shares just
broke out to another new all time high today.  The simple 30-dma
has been the place to buy the dips over the last several months.
Currently that would be near $72.  Look for earnings near the end
of January.

Chart=


---


3M Co - MMM - close: 83.17 change: +0.77

WHAT TO WATCH:  Bullish traders might want to keep an eye on MMM.
The stock has pulled back to price support near $82 and is
trading just above its 40-dma.  The last time shares pulled back
to the 40-dma investors bought the dip, which grew into the next
big push higher.  The company also has earnings on January 20th
and sometimes momentum traders can produce a pre-earnings ramp
up.

Chart=


---


Eaton Corp - ETN - close: 113.32 change: -0.43

WHAT TO WATCH:  Earnings for ETN are coming up on January 21st
but while we wait bulls can look for a retest of the $110 level.
A drop back to $110 would fill the gap from last week and offer a
bounce from round-number support as a potential entry point.

Chart=



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

TASR $103.43 +9.49 - The short-squeeze continues for shares of
TASR.  The stock recently broke out above the $90 level and has
quickly crossed the $100 level on rising volume.

GYI $51.02 +0.82 - Getty Images is still building on a trend of
higher lows and the bounce from $50 today might be worth
watching.

SINA $41.24 +0.59 - Chinese Internet stock SINA has been
consolidating recent gains but might be a play if it breaks the
$42 level.

ADVP $49.71 -0.79 - We listed ADVP on the weekend watch list for
a breakdown under the $50 level.  Now it has occurred and the
stock looks poised to test its $45 mark.  However, ADVP is being
acquired by CMX and shares will trade lockstep with CMX's stock
price.  It just so happens that CMX has dropped to its 200-dma
and looks ready for a breakdown.


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

Another change that the Option Investor Newsletter will be
making in the 2004 is the merging together of the market
posture commentary and the market sentiment commentary.
Starting Tuesday, January 13th, 2004 look for discussion of
the various sector indices in the regularly scheduled market
sentiment column.


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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