Option Investor

Daily Newsletter, Tuesday, 01/13/2004

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The Option Investor Newsletter                 Tuesday 01-13-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Great Expectations
Futures Markets: Dollar Steady
Index Trader Wrap: See Note
Market Sentiment: Waiting to Exhale

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      01-13-2004           High     Low     Volume Advance/Decline
DJIA    10427.18 - 58.00 10509.85 10367.41 1.99 bln   1519/1733
NASDAQ   2096.44 - 15.30  2114.91  2080.29 2.38 bln   1390/1824
S&P 100   555.75 -  3.66   560.05   552.62   Totals   2909/3557
S&P 500  1121.22 -  6.01  1129.07  1115.19
W5000   10935.88 - 53.40 11003.88 10877.32
RUS 2000  581.16 -  1.85   583.18   575.04
DJ TRANS 3017.06 -  2.20  3023.87  2986.81
VIX        18.04 +  1.22    18.33    16.53
VXO (VIX-O)16.87 +  0.62    17.86    16.38
VXN        23.05 +  0.49    23.89    22.26
Total Volume 4,634M
Total UpVol  1,593M
Total DnVol  2,969M
52wk Highs  787
52wk Lows    12
TRIN       1.36
NAZTRIN    1.77
PUT/CALL   0.61


Great Expectations

The markets suffered another setback today and analysts were
racing to find a reason. Greenspan's speech? Rising oil prices
or O'Neil's criticism of the president? Sorry, it is just a
plain case of profit taking on fear that reality may not match
expectations. Even great news for the telecom sector could not
prevent fears that INTC might disappoint.

Dow Chart

Nasdaq Chart

The economic news was mixed and not really a negative for the
market. The Weekly Chain Store Sales fell -0.4% and year over
year growth fell to +4.9% and the lowest rate in five weeks.
Redemption of gift cards remains the primary driver for chain
stores with new cash shopping continuing to slow. Cold fronts
and snow storms are still being used as excuses but in reality
it is the middle of winter. What changed? Cash has dried up.
Mortgage refinancing has dried up and the tax rebates are
history. Until consumers start getting the next round of tax
refunds/rebates there is not much for retailers to look
forward to.

Import Prices rose only +0.2% and only about 1/2 what was
expected. This will be drastically different next month when
the mad cow halt to beef exports hits the tape. Meat export
prices are going to plummet due to oversupply and shortage of
buyers. Beef prices fell -20% after the discovery of the mad
cow in Washington. Rising oil prices are also going to make
an impact with oil moving over $35 in trading today.

Offsetting the Retail Sales news was the Richmond Fed Survey
which fell to 8 for December and down from 11 in November.
Despite the drop the internals were still strong. Shipments
fell -3 points but New Orders rose from 14 to 22. The backlog
remained the same at only 3 and the Six Month outlook rose +3
to 44. The Order Backlog at 22 is the highest level since last
January. The employment component rose to zero from -14 and
this is the first non-negative number in nineteen months. Just
like the Kansas Fed Survey on Monday the headline number fell
but critical components are still showing growth.

Wednesday is a big economic day with Mortgage Applications,
PPI, International Trade and the Fed Beige Book. Thursday is
even bigger with Jobless Claims, CPI, Empire Manufacturing
Survey, Monthly Retail Sales, MAPI Survey, Philly Fed Survey
and the Treasury Budget. Add in the major earnings after the
close Wednesday from YHOO, QLGC and INTC and you have a
critical 48hr period.

Fear of the next 48 hours made the earnings announcements
Tuesday morning even more important. Leading the list was
SAP which reported a drop in software revenues and planted
seeds of disappointment in tech land. SAP was profitable but
the key point was the -3% drop in software revenues. The SAP
results were good but not great. Since SAP is a major
competitor to IBM the road signs were clear to many. IBM had
already been weak on rumors they would not make their revenue
estimates and weakness in competitor revenues seemed to signal
the rumors could be true. IBM does not report until Jan-20th
but IBM fell to six-week lows on the news.

Adding to the SAP negativity was a lowered forecast from
Accenture, (NYSE:ACN), another competitor to IBM. Accenture
missed estimates by a penny but said profits could be as
much as -22% below analyst estimates. Accenture lost -3.66
on the news and helped to push IBM even lower.

The ACN/SAP ripple knocked the Nasdaq back below 2100 but not
by far. You could probably call it an Intel hiccup more than
anything else. With great expectations priced into the market
the first really clear road sign for the global recovery is
going to be Intel tomorrow night. If Intel sneezes the entire
market could catch cold. We know Intel will go out of their
way to spin the news positive. However, if you remember their
last conference in October there was a minor blip after the
call when they admitted there was a small drop in bookings.
This was not picked up by the mainstream press and the
markets rallied on the headline news. Intel did revise to
the upper end of estimates for the 4Q in their mid-quarter
update but the key for tomorrow is their guidance for the 1Q.
Considering the solicitations I am getting by email on almost
a daily basis it appears computer vendors are in a January
sales slump. They don't call/email when business is good. It
could be just a coincidence but I can't wait to see what Intel
has to say.

The Semiconductor Index fell from a 52-week on Monday at
560 to initial support at 540. Considering the huge gains
in the chip sector it is not surprising investors wanted to
take some money off the table before the Intel announcement.
XLNX lost -2.46, PMCS -1.30, NVLS -1.79. Bucking the trend
was LSCC which finished the day positive and appeared ready
to launch even higher from 11.50 support.

Also used as an excuse today was the Greenspan speech but
while uninspiring there was nothing really detrimental to
the markets. He said the lack of job creation would not
keep the economy from growing and the lower dollar really
did not matter. Dallas Fed President McTeer said he was
"shocked" by the Friday Jobs report showing only +1000 jobs
created in December. He said he expected a seasonal adjustment
and the missing 149,000 jobs would show up in January's report.
Let's hope he is right. He said he expected strong growth and
low inflation for some time to come. This reinforced thoughts
that the Fed would not be raising rates soon. Fed Governor
Olson also pushed that common thought by reiterating the
"considerable period" phrase in a speech. Let's hope the
"seasonal adjustment" McTeer spoke about is a real adjustment
and not the Fed just pushing the numbers around in our best

The Conference Board published a survey that showed CEOs'
were less positive about the future than they were before.
The poll's outlook component also fell to 66 from 73 for
the first six months of 2004. This drop was contrary to
the rise in confidence in current conditions to 68 from 64
from the 3Q to the 4Q of 2003. The Conference Board did not
feel this was a problem and more of an acknowledgement that
the soaring growth from the 3Q could not continue.

The earnings parade is beginning this week with the consensus
estimates now up to +26% for the 4Q. These great expectations
are very risky and it will not take many more events like
SAP and Accenture to puncture the balloon. Even if the
earnings do come in as expected we know from experience that
just meeting estimates does not normally send markets higher.
They have to meet or exceed estimates and guide higher. This
does not take into account the current tech valuations at a
two-year high. YHOO is currently trading at a PE of 145 for
just one example. Insider sales are typically a leading
indicator for earnings. Since YHOO hit $40 insider selling
has been very brisk. The CFO, somebody who knows exactly
what the numbers will be, just sold 80,000 shares. We will
get to see tomorrow if he was beating the rush or simply
capitalizing on the good news ahead to exit without a cloud
of questions.

As an example of the lack of upward momentum we saw almost
no impact from the $2.3 billion telecom deal with China today.
Motorola, the biggest winner with over $1 billion, only gained
+12 cents. Lucent with a +$350 million win gained +6 cents.
CSCO got $140 million and lost -14 cents. Nortel showed the
biggest gains at +21 cents. Unlike most contract awards that
take years to play out this contract will be completely
funded in 2004. Instant money for current products but no
real impact to prices. Another problem there is a demand
that the companies turn over the intellectual property to
China to enable them to make these products on their own in
the future. They also demanded a different encryption method
than currently in use. Last I checked they were still a
communist nation. Sure, sell them $2.3 billion in goods and
then give them the results of years of research so they can
avoid buying anything else in the future.

Also hurting the markets was continued depression in the
homebuilder sector. Centex announced orders that were less
than expected and MDC Holdings disappointed as well. The
analysts coming out against the sector multiplied overnight.
Most of the builders lost ground again but not by big losses.
The bulls still believe in them and with the single digit
PE numbers where else are you going to find values this cheap?
The Homebuilder Index (HGX) is well off its highs but still
lofty in relative terms. As long as it does not break two
month support at 345 the bulls will likely buy the dip. The
next material support is in the 300 range. The HGX is
optionable but expensive.

Tech worries also grew from the banking sector after
several banks reported earnings that expressed concern
that commercial loan demand was soft. This suggests that
an IT recovery may be muted if loans to purchase and upgrade
equipment are not in demand. BBT and STT suggested 2004
could be a challenging year.

The market action was both confusing and frustrating depending
on your market view. The Dow dropped -118 intraday day but
rebounded to close down only -58. The dip was well under Dow
support at 10400 but the rebound put it back above that
support to 10427. Bottom line, was this a bearish day or a
bullish day? Or was it just a profit-taking day? Since the
high near 10600 last Thursday the Dow has trended down and
today was no exception. The minor rebound on Monday was just
a short term oversold dip buy. Today was a continuation of
Friday due to worries over IBM and Intel and earnings in
general. So far it is just cautious profit taking. 10400 is
strong support and I was surprised to see it break today
even on the earnings disappointments. Tomorrow and Thursday
are the key. Should 10400 break again the next real support
is 10300 then 10100. Volume was skewed 2:1 to the downside
and it was moderately heavy with 4.6 billion across all
markets. If we break 10400 again I expect that volume to
rise and the imbalances to be strongly negative. Bulls have
got to be worried but the bears still have no conviction.

The Nasdaq dropped below 2100 but held solid on four day
support at 2080. The tech advance has been so strong there
is only minimal support below that at 2050 with much stronger
support at 2000. If the techs disappoint on Wednesday night
it is very conceivable we could test 2050 by Friday. The
tech big caps have been slipping as funds cautiously move
cash they stored in late December out of these stocks and
into other vehicles. MSFT has been trending down sharply
for the last three days. Today was the first INTC drop as
investors clung to the earnings run hope. Despite the drop
today the Nasdaq has been exhibiting serious strength. If
it can pass the test this week the tech bulls will be

Regardless of your market view the rest of this week should
be exciting. We are seeing volatility return to the market
and buyers are finally seeing some dips. Odds are good there
will be some earnings winners this week and probably some
more losers. Keep your powder dry because the bargains are
on the way.

Enter Passively, Exit Aggressively.

Jim Brown


Dollar Steady
Jonathan Levinson

The absence of dramatic, handwringing dollar selling
distinguished today's session, and gold, silver, the CRB and
equities pulled back against strength in treasuries.

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 held its gains from Monday, not advancing
particularly much but not crashing to new lows either as we've
been coming to expect.  While today's candle printed red, the
losses were very minor and the daily cycle oscillators are
suggesting the first hint of an uptick, with today putting in a
higher low over yesterday.  The CRB broke 270 to the upside
before retreating, finishing -1.32 at 268.41, with natural gas,
heating oil and wheat futures leading the declines.

Daily chart of February gold

February gold traded both sides of unchanged today, spending the
afternoon fractionally negative despite considerable weakness in
the mining indices, with both XAU and HUI down by more than 2%
for the day.  This divergence is either late-comers to the
precious metals party getting shaken out of their recent longs,
or the precursor to a meaningful correction in the admittedly
extended metals.  Gold remains very firm, not testing the lower
rising bear wedge trendline.  The daily cycle oscillators remain
topped out and on the cusp of a rollover, but until support at
420-422 breaks, the price trend remains up.  For the day,
February gold dropped .10 to 424.70, intraday low 423.20, high

Daily chart of the ten year note yield

The Fed drained 3B net today, adding 3.5B in overnight repos
against 6.5B expiring.  We expected weakness this morning, as
equities and treasuries traded lightly negative, but the
uncertainty resolved itself with treasuries reversing to positive
territory to close near their sessions highs against the equity
weakness.  The daily cycle downphase on the ten year note yield
reasserted itself to see the TNX close lower by 5.5 bps at
4.028%.  Support at 4% is spitting distance from here and should
be tested tomorrow.  Next downside support is at 3.92%.

Daily NQ candles

The NQ sold off for most of the session, finding double-bottom
support at 1515 and bouncing at 2:45PM.  For the day, it was
lower by 15 points or .97%, closing at 1529.50.  The move covered
the entire range of the rising flag, and brought the 10-day
stochastic one step closer to the sell signal for which we've
been waiting since mid-December.  The tenacity of the bounce at
2:45PM was another reaffirmation of the uptrend in which price
finds itself.  Key support remains 1515-18, resistance at 1550,
with preliminary resistance in at 1533.

30 minute 20 day chart of the NQ

The NQ's afternoon bounce ended the longest 30 minute cycle
downphase we've seen in weeks and kicked off a new upphase that
lasted into the close.  It closed at the broken rising trendline,
the "scene of the crime" at 1428.  This minor resistance should
fail, given the strength of the 30 minute cycle upphase, and any
upside from here will confirm the bounce from what appears as the
neckline of a rough, sloppy head and shoulders-esque formation
with an oversized right shoulder.  A lower high on this bounce
would be bearish, as it would confirm that the daily cycle
(above) has turned.  A break above 1550 would launch the next leg
of the bull run, and constitute a trending move on the daily and
weekly oscillators.

Daily ES candles

The ES dropped 7 points or .62% to close at 1121.25, bouncing
from the lower rising flag trendline.  Like the YM, it printed a
sell signal on the 10-day stochastic, and while such appears
imminent on the Macd, it has not yet occurred.  A strong up day
tomorrow would likely "undraw" this signal, and a break below
today's low of 1113.75 would be necessary to confirm a new
downphase on this critical timeframe.  Support at 1118 failed but
not on a closing basis, and it remains to be seen whether this
sideways correction within the rising channel is a bull flag or a
rounded top.

20 day 30 minute chart of the ES

The "rounding top" interpretation is somewhat more compelling on
the 30 minute candles, with a neckline at today's low and
projecting to support in the 1094-6 area.  That said, the 30
minute cycle turned on the afternoon low and set off a new
upphase, so downside projections may be a bit premature here.
There's mild confluence resistance at 1124, but if this 30 minute
upturn has any legs at all, that level should fail.  All but the
most aggressive bears should wait for a break of 1113.75 to throw
short.  Next serious resistance is at 1130-33, and a failure at
or below that level will confirm that the daily cycle is
commencing a new downphase.

150-tick ES

The short cycle upphase finished near the top of its range, and
Keltner resistance 1122.50 could be the top of this short
timeframe cycle.  These oscillators trend easily, and so it's not
worth hanging too much bearish weight on this indicator alone so
long as the 30 minute oscillators are pointed up.

Daily YM candles

The YM lost 66 points or .63% to close at 10414, printing an
intraday low at 10341, just one point above the head and
shoulders target discussed in last night's Futures Wrap.  The
daily cycle oscillators have given clear, confirmed sell signals,
but the doji bottom printed today indicates a distinct lack of
commitment to the lows of the day.  Bears are looking for a lower
high here.

20 day 30 minute chart of the YM

The 30 minute cycle upturn was weakest on YM, as 10390 proved
tenacious resistance.  That level as a neckline sets up a
potential head and shoulders target of 10180 if it plays out, but
again, bearish speculation is in vain so long as the 30 minute
cycle indicators are pointed up.

The dollar's steadiness on Monday's gains was good news for
dollar bulls, but potentially bad news for commodity, equity and
foreign currency bulls.  It's too early to tell whether what
Fleck has termed the "binary trade" will deliver in the other
direction as well-  a falling dollar has been bullish for
everything else, and now we're seeking to determine whether a
rising dollar will be bearish.  Treasuries seem to be on a
separate cycle altogether, but so far, today was just a
correction of otherwise strong trends.  I'm hoping that tomorrow
will provide us with more clues.  See you in the Futures Monitor.


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Waiting to Exhale
- J. Brown

The official start to the Q4 earnings season may have been last
week with Alcoa but tomorrow really brings out some heavy weights
with Apple Computer (hardware), Intel (semiconductors), Yahoo!
(internets), Genentech (biotech), and QLogic (semiconductors).
Thursday brings even more with Bank of America (banking), Juniper
Networks (networking), and Sun Microsystems (hardware) just to
name a few.  What these companies have to say about their future
guidance will carry the spotlight and help set the tone for the
rest of the quarter.

In the mean time traders are holding their breath until these Q4
reports are released. Volatility in stocks and the options market
has been rising as investors try and position themselves in front
of these events.  Without any major news today, aside from a
Greenspan speech in Germany where he really didn't say much,
stocks pulled back as some investors took some money off the
table.  Those sectors hardest hit by the selling were
semiconductors and software.

Intel's earnings report after the bell tomorrow is a major event
and the SOX dipped 2.77% after a strong four-week rally from its
December lows.  We've been hearing for months now about how great
2004 is going to be for chip sales and Wall Street wants to hear
it from Intel in their guidance going forward.  Should Intel
disappoint we'll probably see the SOX reverse course and head
back toward its December lows, pausing near the 500 level to
catch its breath.

The GSO software sector also looks a little toppy and the index
fell 1.88% after German software maker SAP announced that its
fourth quarter sales slipped 3% from last year.  MSFT, ORCL and
PSFT all reacted negatively to the news.

The remaining sector indices also provided some interesting
observations.  The BIX banking index has fallen for two weeks
straight and pierced its simple 50-dma today before rebounding by
the close.  Considering the post-earnings reactions to some of
the banking stocks who announced today we're liable to see more
weakness here.

The DRG drug index has also been in a steady decline with today
marking the fourth loss in a row.  Recent broker comments have
not been kind to some of the larger drug makers and the group is
pulling back after a very strong December.

I'm also a little surprised by the drop in the XAU gold & silver
index since the dollar continue its own drop against the yen and
the euro but then February gold futures also fell more than $2.00
to $424 an ounce.


Market Averages


52-week High: 10592
52-week Low :  7416
Current     : 10427

Moving Averages:

 10-dma: 10486
 50-dma: 10040
200-dma:  9328

S&P 500 ($SPX)

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

Moving Averages:

 10-dma: 1120
 50-dma: 1075
200-dma: 1002

Nasdaq-100 ($NDX)

52-week High: 1541
52-week Low :  795
Current     : 1524

Moving Averages:

 10-dma: 1502
 50-dma: 1434
200-dma: 1292


Today marks the third day of gains for the VXO and VIX.  While it
is normal to see volatility spike when the indices trade lower we
also have to remember that Friday is an options expiration and we
could be seeing an unusual number of put buying by investors to
protect current profits.

CBOE Market Volatility Index (VIX) = 18.04 +1.22
CBOE Mkt Volatility old VIX  (VXO) = 16.87 +0.62
Nasdaq Volatility Index (VXN)      = 23.05 +0.49


          Put/Call Ratio  Call Volume   Put Volume

Total          0.61      1,132,464       690,443
Equity Only    0.48        883,197       423,555
OEX            0.60         71,225        42,709
QQQ            1.14         88,348       101,028


Bullish Percent Data

           Current   Change   Status
NYSE          77.6    + 0     Bull Confirmed
NASDAQ-100    81.0    + 1     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: 1.15
10-dma: 1.03
21-dma: 0.97
55-dma: 1.07

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1349      1386
Decliners    1514      1712

New Highs     306       229
New Lows        7         6

Up Volume    801M      721M
Down Vol.   1126M     1611M

Total Vol.  1947M     2364M
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

Was it a one-week blip?  The surge in long positions by
commercial traders have evaporated.  Was a sudden change of
heart or did they just get caught up in the holiday spirit?
Of course there was an equally strong disappearing act in
commercial short positions so maybe they're just confused.
Small traders have really cut back on their shorts and in
effect become extremely bullish.

Commercials   Long      Short      Net     % Of OI
12/09/03      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

Wow!  The disappearing act in the full contracts (above)
is nothing compared to the drop in contracts below.  Commercial
traders really reduced their outstanding long positions in the
e-mini's and that's not a bullish development. Right on cue,
the small traders cut back on their short positions.

Commercials   Long      Short      Net     % Of OI
12/09/03      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


We see the same contract evaporation in the NDX futures as well.
Commercial long contracts lost 1/3 of their number but short
contracts were cut in half.  That actually sounds bullish.

Commercials   Long      Short      Net     % of OI
12/09/03       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


This time it is the small traders that drastically reduced
their short contracts.  They probably got tired of losing
money.  Commercials followed suit.

Commercials   Long      Short      Net     % of OI
12/09/03       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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The Option Investor Newsletter                  Tuesday 01-13-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: YHOO
Dropped Puts: None
Call Play Updates: DGX, DLX, GD, GILD, MXIM, STJ
New Calls Plays: AMZN, APOL
Put Play Updates: ADBE, CFC, DIA
New Put Plays: None


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


Yahoo! - YHOO - close: 48.80 change: -0.94 stop: 49.00

It's time to step aside before YHOO announces earnings tomorrow
after the bell.  We had planned to close the play as of Tuesday's
close but our new stop loss from yesterday has us closing the
play at $49.00 for a $4.00 move.  Shares could be volatile
tomorrow as investors try and position themselves before the
report.  Analysts are estimating 11 cents a share on revenues of
$495 million.  YHOO's announcement is important because it will
set the stage for the next quarter in a year where many are
looking for online advertising to rise 20%.

Picked on December 24 at $45.01
Change since picked:     + 3.79
Earnings Date          01/14/03 (unconfirmed)
Average Daily Volume:      12.3 million
Chart =




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Quest Diagnostic - DGX - close: 73.51 chg: -0.09 stop: 69.99

DGX continues to churn sideways, consolidating its gains from
late December.  In this case that's a good thing because it
failed to participate in the market-wide drop this Tuesday.  We
remain cautious on DGX.  Its earnings report is expected on
Tuesday, Jan. 27th, which means we'll probably close the play on
Friday the 23rd.  That doesn't leave a lot of time for the stock
to move and we're not suggesting new positions at this time.
More conservative traders may want to raise their stop
under the simple 50-dma currently at 70.90.

Picked on December 30 at $72.95
Change since picked:     + 0.56
Earnings Date          01/27/03 (unconfirmed)
Average Daily Volume:      836  thousand
Chart =


Deluxe Corp. - DLX - close: 41.99 change: +0.33 stop: 40.50

Meandering around the site of its breakout from last week, DLX
just hasn't been able to make any meaningful upside progress.
The stock appears to be consolidating that breakout near the
$41.75 level, confirming that former resistance as new-found
support.  Entries on intraday dips near this level seem to be the
best way to play, as we await the eventual breakout over the 200-
dma ($42.86), which served as resistance on last week's surge
higher.  Yesterday the company confirmed that earnings would be
released on January 29th before the open, so that gives us just
over 2 weeks for the stock to get moving and achieve our $45
upside target.  As noted above, the first meaningful resistance
is found at the 200-dma and then up at $44.  Due to these webs of
resistance, pullback entries remain the more prudent strategy.
Maintain stops at $40.50.

Picked on January 6th at     $42.30
Change since picked:          -0.31
Earnings Date               1/29/04 (confirmed)
Average Daily Volume =        343 K
Chart =


General Dynamics - GD - close: 92.15 chg: +0.40 stop: 88.50

Shares of GD were able to out perform the markets today with a
40-cent gain and a decent intraday bounce off its low of $90.75.
The stock is still churning sideways above the $90 level and
digesting its gains from last week.  We're quickly approaching
its earnings report expected on Jan. 21st and will probably close
the play this weekend or next Tuesday ahead of its report.
Fortunately for shareholders a number of defense stocks have been
able to maintain their bullish trajectories versus so many stocks
that look tired and more prone to profit taking.  This morning
Bank of America reiterated their "buy" rating on GD.

Picked on December 21 at $88.78
Change since picked:     + 3.37
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million
Chart =


Gilead Sciences - GILD - cls: 61.42 chng: -1.43 stop: 58.50*new*

Investors still seem to be trying to catch their breath after
GILD's strong breakout last week and the stock has spent the past
4 sessions consolidating in a rather wide range of $60.50-64.00.
This pattern looks like a bullish continuation flag in process
and it will be confirmed by a breakout over $64.  That allows us
to refine our upside target to $68, which would represent an
equal move above the flag as that which preceded it.  Dip-buyers
can take advantage of near-term weakness to enter in the $60-61
area as the stock tests the bottom of the consolidation zone.
Moving averages are rising to meet the price action and we may
have to wait for the 20-dma ($59.22) to get over $61 before price
will actually launch higher.  Aggressive traders that want to
enter on further strength will need to wait for a push through
$64 before playing, and will need to watch out for potential
resistance at $66 near the top of the September gap.  Note that
we're raising our stop to $58.50 tonight, keeping it just below
the ascending trendline connecting the lows of the past few

Picked on December 21st at   $59.40
Change since picked:          +2.02
Earnings Date               1/29/04 (unconfirmed)
Average Daily Volume =     3.89 mln


Maxim Integrated - MXIM - cls: 55.28 chg: -0.71 stop: 51.45 *new*

Wow!  What a run in the chip stocks.  We were expecting a pull
back after last Friday's performance but the SOX and MXIM just
kept going.  We're very encouraged by MXIM's performance today.
The SOX lead the decliners with a 2.77% drop but MXIM only
slipped 1.26% and still held above the $55 level.  Short-term
traders will probably want to consider taking some money off the
table now.  Tomorrow and Thursday could be rather volatile as
investors try and position themselves ahead of Intel's earnings
report due out after the bell on Wednesday.  We're going to
reduce our risk by upping our stop to $51.45.

Picked on January 06 at $51.89
Change since picked:    + 3.39
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =


Saint Jude Medical - STJ - close: 63.00 change: -0.43 stop: 59.99

Monday morning brought us the breakout over $64.00 but there was
no follow through.  The sideways to weak market these last two
sessions have not helped but shares of STJ appear to be holding
up okay.  Currently our play is triggered at 64.01 with a stop at
59.99.  More aggressive traders can look for bounces above $62
but the rest of us should probably wait for STJ to trade back
above the $64 mark.

Picked on January 12 at $64.01
Change since picked:    - 1.01
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      1.4 million
Chart =


Amazon.com - AMZN - close: 54.91 chg: +1.96 stop: 49.99

Company Description:
Amazon.com, a Fortune 500 company based in Seattle, opened its
virtual doors on the World Wide Web in July 1995 and today offers
Earth's Biggest Selection. Amazon.com seeks to be Earth's most
customer-centric company, where customers can find and discover
anything they might want to buy online, and endeavors to offer
its customers the lowest possible prices. Amazon.com and sellers
list millions of unique new and used items in categories such as
apparel and accessories, sporting goods, gourmet food,
electronics, computers, kitchenware and housewares, books, music,
DVDs, videos, cameras and photo items, toys, baby items and baby
registry, software, computer and video games, cell phones and
service, tools and hardware, travel services, magazine
subscriptions and outdoor living items.
(source: company press release)

Why We Like It:
It may come as a surprise for some traders that AMZN made the
call list given the market's recent weakness but shares of AMZN
have been exceptionally strong the last three sessions in a row.
As a matter of fact the stock looks ready to break out of its
multi-week consolidation.

There appears to be little doubt that online sales this holiday
season were strong and traders could be ramping up shares of AMZN
in anticipation of a blow out Jan. 27th earnings report.
However, this might be a higher-risk play given YHOO's earnings
report due out tomorrow after the closing bell so we're going to
use a TRIGGER at $55.01 to open the play for us.  Until AMZN
trades above this level we're just spectators.  Once triggered
we'll start the play with a stop loss at 49.99 and then adjust it
higher as it progresses.

Suggested Options:
We really don't plan to hold over AMZN's earnings report on Jan.
27th so our preference is the February strikes.  The February
55's are probably the best bet.

BUY CALL FEB 50 ZQN-BJ OI=2785 at $6.30 SL=4.25
BUY CALL FEB 55 ZQN-BK OI=6379 at $3.20 SL=1.75
BUY CALL APR 55 ZQN-DK OI=4537 at $4.90 SL=3.00

Annotated chart:

Picked on January xx at $xx.xx <-- see trigger
Change since picked:    + 0.00
Earnings Date         01/27/04 (confirmed)
Average Daily Volume:       10 million
Chart =


Apollo Group - APOL - close: 72.63 change: +0.49 stop: 68.50

Company Description:
The Apollo Group provides higher education to working adults.
The company operates through its subsidiaries, The University of
Phoenix, Inc., Institute for Professional Development, The
College for Financial Planning Institutes Corporation and Western
International University, Inc.  APOL offers its programs and
services at 58 campuses and 102 learning centers in 36 states,
Puerto Rico, and Vancouver, British Columbia.

Why we like it:
Allegations from a former employee of falsifying enrollment
numbers sent shares of CECO tumbling in early December and the
fear of there being some truth to the story sent the entire group
of educations stocks sharply lower.  But after the company
refuted the claims, the stock, along with the rest of the group
consolidated and then headed back up.  Suffering the least and
bouncing back the strongest of the group is APOL.  The stock was
the only one to not violate its 50-dma on a closing basis and
after consolidating just above that mark, has been rising
steadily since breaking near-term resistance at $69 in early
January.  Rising right to strong resistance at $73 (the site of
the December highs), the stock has been chipping away at that
resistance for the past week and today's close just below that
market has the look of a pending breakout.  After rebounding from
the bullish support line near $63, APOL has generated another PnF
Buy signal, with a tentative bullish price target of $88.  That
should give us enough upside room for a bullish play, especially
with earnings not scheduled to be released again until the middle
of March.

We want to make the stock prove its strength to us first though,
so we're initiating coverage with a trigger at $73.25, just over
the December high.  The best entries will likely come on the
initial breakout, although more conservative traders may want to
wait for a subsequent pullback and rebound from the $72-73 area,
confirming that old resistance has become new support.  Our
upside target will be for a rally to the $80 level and we'll use
an initial stop at $68.50.  That's below the level of the early
January breakout, as well as the 20-dma ($69.38).  The
consolidation of the past week has been finding intraday support
just above $70, so in reality we shouldn't see that level
violated after the breakout over our trigger.  More conservative
traders can use a stop just below $70.

Suggested Options:
Shorter Term: The February 75 Call will offer short-term traders
the best return on an immediate move, as it is just slightly out
of the money.  Short term traders with a less aggressive stance
will want to use the ITM February $70 call.

Longer Term: Aggressive longer-term traders can use the May $80
Call, while the more conservative approach will be to use the May
$75 strike.  Our preferred option is the February $70 strike,
which is in the money and should provide sufficient time for the
play to move in our favor.

! Alert - January options expire this week!

BUY CALL FEB-70*QAQ-BN OI=4424 at $4.30 SL=2.75
BUY CALL FEB-75 QAQ-BO OI= 971 at $1.60 SL=0.75
BUY CALL MAY-75 QAQ-EO OI=1507 at $4.10 SL=2.50
BUY CALL MAY-80 QAQ-EP OI= 210 at $2.30 SL=1.25

Annotated Chart of APOL:

Picked on January 13th at    $72.63
Change since picked:          +0.00
Earnings Date               3/18/04 (unconfirmed)
Average Daily Volume =     2.11 mln
Chart =


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Adobe Systems - ADBE - close: 37.19 change: -0.17 stop: 40.00

As convincing as Friday's break below strong support at $38 and
the 200-dma (now at $37.34) appeared, shares of ADBE have
amazingly kept from falling further this week.  The stock has
been hugging the 200-dma, unable to move substantially above or
below it, but based on the large-range engulfing candle on the
Software index (GSO.X) on Tuesday, it looks like that resilience
may be about to end.  If the GSO index breaks $157.50 support,
then it ought to drop back towards strong support near $150-152
and that ought to give ADBE the first shove lower toward initial
support in the $34-35 area.  Of course, if the stock manages to
rebound a bit before breaking down further, then we may be
treated to a higher entry point on a rollover from resistance,
now firm in the $38-39 area.  That resistance is reinforced by
the declining 20-dma ($39.06) and 30-dma ($39.40).  Due to the
potential for support near $36, entering on a rollover from
resistance holds more appeal than chasing the stock lower.
Maintain tight stops at $40, as a break above that level will
definitely change the current bearish tone for ADBE.

Picked on January 11th at     $37.12
Change since picked:           +0.07
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.37 mln
Chart =


Countrywide Financial - CFC - cls: 70.30 chng: -0.88 stop: 74.00

After last Friday's rebound from support, it looked like we might
have a bit of a wait until CFC would tap its entry trigger.  But
the company's revised earnings guidance towards the lower end of
its prior range generated some weakness at the open yesterday,
with the stock beginning the day just over $69 and below our
$69.70 trigger.  CFC quickly rebounded from the early dip, but
then found intraday resistance near $71.50 and dropped from there
today to spend most of the session dancing on the $70 level.
Satisfying that trigger should have generated greater weakness,
but it appears that the 100-dma ($68.74) is still in play as
potential support.  One strategy would be to use successive
failed bounces below strong resistance at $73 to initiate new
positions, while more conservative players will want to wait for
a break under the 100-dma before playing.  We'll maintain our
stop at $74 tonight, which is now well above the 10-dma ($73.17)
that has been providing intraday resistance for the past few

Picked on January 8th at      $70.95
Change since picked:           +0.65
Earnings Date                1/27/04 (confirmed)
Average Daily Volume =      1.84 mln
Chart =


Diamonds Trust - DIA - cls: 104.50 chng: -0.67 stop: 106.25

Playing out according to our script, DIA rebounded slightly on
Monday and continued that upward correction this morning, giving
us the ideal entry point as the bounce failed near $105.25 before
dropping sharply towards the 20-dma ($103.89).  That average
provided enough support for an afternoon rebound from the lows,
but there wasn't enough strength to get anywhere near positive
territory, resulting in the second close below the 10-dma
($105.03) in the past 3 days.  The downside correction appears to
be just getting underway now, with the sell signals on the daily
Stochastics and MACD oscillators becoming more solid.  The $104
level is still holding up as closing support and we'll need to
see that level break before we can really say that the bears are
gaining the upper hand.  Another failure below the 10-dma can be
used for new entries, while momentum traders will need to see a
break below today's intraday low to chase price lower.  Maintain
stops at $106.25 for now.

Picked on January 8th at     $104.69
Change since picked:           -0.19
Earnings Date                    N/A
Average Daily Volume =      5.73 mln
Chart =




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The Option Investor Newsletter                  Tuesday 01-13-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: A Watch List for Either Direction


Centex Corp - CTX - close: 98.81 change: -1.59

WHAT TO WATCH:  There are certainly a lot of opinions out there
about the housing sector but whatever stance you take we can't
deny that the group has come under some heavy profit taking in
the last couple of weeks.  The selling may not be done yet.
CTX's breakdown under the $100 (again) could portend a move back
toward the $90 level or even its 200-dma nearing the $85 region.
Just be careful if you decide to take bearish positions.  The
group has a loyal following that will try and buy the dip.
Traders need to be aware of CTX's Jan. 20th earnings report as



General Motors - GM - close: 53.30 change: -0.53

WHAT TO WATCH:  GM might be setting up for a profitable bearish
play.  Shares have produced an incredible run from early
December's levels near $42.50 to the recent January highs above
$55.  Now the stock looks tired and all of its technical
oscillators have rolled over into bearish sell signals.
Aggressive traders could use a trigger under today's low and
target a move back toward its simple 50-dma near 47.50.  Watch
out for earnings on Jan. 20th.



eBay Inc - EBAY - close: 65.69 change: +1.49

WHAT TO WATCH:  Shares of EBAY showed some impressive relative
strength today despite weakness in the NASDAQ and the INX
internet index.  Traders bought yesterday's dip to $62.50 and now
the stock is at a new closing high.  One might expect the stock
to remain strong as investors wait for EBAY's Jan. 21st earnings
report but there is always an opportunity for another tech
company's earnings miss to inject fear into EBAY's shareholders.



Best Buy Co - BBY - close: 53.83 change: +0.48

WHAT TO WATCH:  Shares of BBY broke their rising channel back in
December but investors bought the dip and the stock is inching
higher again.  If BBY can breakout above the $55 mark and its
simple 50-dma bulls might be able to ride it back toward the $60
level and maybe its current highs near $62.50.


RADAR SCREEN - more stocks to watch

SUNW $5.50 +0.05 - SUNW is already up more an 20% for 2004 and
the stock hit levels not seen since June 2003.  Watch for a
reaction after it reports earnings on Thursday.


Full Service Brokers

Man Financial announces the formation of the OneStopOption
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

Live Broker and Online Trading Available     888-281-9569




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