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Daily Newsletter, Thursday, 01/15/2004

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The Option Investor Newsletter                Thursday 01-15-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Confusion Reigns
Futures Markets: Dollar Upphase
Index Trader Wrap: Thinking about a 4-day weekend
Market Sentiment: Sell The What?


Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
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      01-15-2004           High     Low     Volume Advance/Decline
DJIA    10553.85 + 15.50 10592.74 10477.18 2.21 bln   1597/1650
NASDAQ   2109.08 -  2.10  2121.61  2088.10 2.22 bln   1646/1516
S&P 100   560.42 +  0.65   562.96   556.96   Totals   3243/3166
S&P 500  1132.05 +  1.53  1137.11  1124.50
W5000   11036.78 + 13.80 11080.04 10959.60
RUS 2000  586.36 +  0.24   587.31   579.30
DJ TRANS 3018.48 - 13.10  3032.01  3001.04
VIX        15.56 -  1.19    17.31    15.49
VXO (VIX-O)16.23 -  0.47    17.31    16.04
VXN        22.64 -  0.53    24.03    22.18
Total Volume 4,827M
Total UpVol  2,413M
Total DnVol  2,200M
52wk Highs  921
52wk Lows    12
TRIN       1.00
NAZTRIN    0.88
PUT/CALL   0.58
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Confusion Reigns

Good news, Bad news and news overload all combined to confuse
investors on Thursday. The earnings parade began with some
tech leaders and while the earnings were good the guidance
was questionable to some. Techs crashed, soared and crashed
again as volatility returned to the stock market. Expectations
for more tech earnings after the close today kept a floor
under the afternoon selling. After yesterday's news you would
have expected the opposite. Earnings runs appear to be alive
and well.

Dow Chart - Daily


Nasdaq Chart - Daily



The markets are in "hold your breath" mode as we await the
various earnings announcements. With each release there is
the normal rapid fire trading as winners and losers quickly
exchange shares while the talking heads on TV weigh the
opposing benefits of each line item on the announcement.
The magnitude of the tech announcements over the last two
days has left tech investors in a daze. There were four big
techs last night, IBM this morning and four more techs tonight.
The consensus of opinion on tech earnings appears to be the
4Q was a decent quarter with strong buying in December. The
general guidance is positive with comments like "starting to
see a pickup in IT spending" and several firms have raised
their outlook. If everything is so positive then why did the
markets end flat today?

First we need to review the economics for the day. You could
not have asked for better results in most cases but there are
still some questionable signs about the recovery that worry
analysts. Jobless Claims continued to fall at 343,000 and a
drop of -11K for the week. The four-week moving average fell
to 348,000 and the first time under 350K since early 2001.
Continuing claims also fell to 3.13 million and that suggests
we may be seeing some hiring. If historical trends continue
we should see a pickup in Nonfarm Payrolls soon. In 1992
during the last post war recovery we saw a sharp pickup in
new jobs once claims fell under 350K a week. Still far too
soon to draw conclusions but we are on the right track.

The Consumer Price Index only rose +0.2% in December and the
Core rate rose only +0.1%. This makes the core inflation rate
for all of 2003 only +1.1% and a 40-year low. The index should
slow again for January after the impact of mad cow on our
beef prices. The headline inflation rate of +1.9% is a 16-year
low. The Fed is on track with the claim of no inflation in
sight despite the rapid acceleration in commodity prices.
However, inflation tends to appear suddenly and you can bet
it will not stay at multi-decade lows for long if this
recovery really catches fire. But, that is a problem for
the post election Fed.

The NY Empire Manufacturing Survey soared to 39.2 and a record
high. This was well above the consensus estimate of 34.5. The
manufacturing industry in New York suddenly seems to be
exploding with 86% of survey respondents reporting new orders
last month. Shipments have increased for five consecutive
months. Prices paid jumped to 28.2 from 12.5 but prices
received only rose to 3.9 from -1.0. Seeing a trend here? You
can sell anything if you give it away. With costs rising but
prices remaining low it will put a squeeze on profits if it
continues. The employment component fell slightly but the
average workweek jumped to 19.0 from 6.6. This suggests the
need to add employees in the future now that hours are rising.

The Philly Fed Survey echoed the results in the NY Survey.
The headline number jumped to 38.8 from 30.2 when the
consensus was looking for a slight decline to 29.0. This
was the highest reading since 1993. Contrary to the NY
Survey there were some larger signs of inconsistency.
Employment fell along with the average workweek. The
six-month outlook also fell. Unfilled orders fell to 10.7
from 15.5. New Orders dropped slightly and shipments fell to
33.1 from 39.6. The only component that rose materially was
prices paid which again suggests a profit squeeze. The bottom
line was an increasing manufacturing environment but
increasing at a slower rate. The weak components could have
been due to a seasonal influence but we have to wait until
February to find out.

The MAPI index of future business activity rose to 77 for
December and suggests that manufacturing activity is about
to surge. This was the highest number on record for the
entire 31 years of the index. Typically the MAPI index
predicts business conditions 3-6 months in the future. The
MAPI index is a quarterly index and the prior number for
the quarter ending in September was 68. The advance shipments
component jumped to 91 for December. This projects shipments
for the 1Q of 2004. Backlogs rose to 67% from 51% in Sept.
Unlike the NY and Philly surveys the MAPI survey is a
forecast based on the last quarter where the others are
current conditions surveys.

The monthly retail sales for December came in at +0.5% and
below consensus of +0.8%. If you take out autos the increase
was only +0.1%. This was not an exciting December but we
already knew that from the weekly numbers. Were it not for
the reported surge in the week before Christmas it would
have easily been negative. While on the surface it looks
bad it is deceiving. The headline number compares sales to
the prior month. If you compare it to the prior December
you get a healthy +6.7% growth. It is all in how you report
it. It was the best fourth quarter for non-auto sales since
1999. Surprised? Oct/Nov were still seeing the cash from
tax rebates and mortgage refinancing. Had it not been for
December dragging down the numbers the quarter would have
been much higher. This will create some seriously tough
numbers for comparisons in 2004 for both the 3Q and 4Q.

Economic reports due out Friday include Business Inventories,
Industrial Production and Consumer Sentiment.

What a day for stock news! I am not going to rehash the
earnings from last night except to show how investors voted
their approval. INTC -0.33, YHOO -0.30 and a big recovery from
a -2.50 intraday loss. QLGC -2.68 and AAPL -1.35. The losses
would have been a lot bigger had it not been for IBM and their
strong earnings and guidance. This reversed the tech sector
depression helped lead the markets back from the depths.

IBM posted surprisingly strong results and by changing their
release date after the close on Wednesday caught everybody
off guard. Services contracts, which had been rumored to be
a weak point in December, soared and beat estimates by a
wide margin. The backlog of service orders rose to a monster
$120 billion. IBM earned $1.56 per share with estimates only
$1.50. Only $1.50? Obviously any company would be thrilled
to earn $2.7 billion. For the first time in years IBM gave
a long term outlook and suggested analysts were light on
estimates. That put the squeeze on those suggesting that
IBM was mired in problems and on those short the stock.

The only real problem for those results was the currency
translation issue. IBM reported a +9% jump in revenue to
$25.9 billion. If you remove the currency impact that number
drops to only a +1% gain at $23.9 billion. That is nearly
a $2 billion windfall because of the low dollar. Obviously
investors did not care that the headline numbers were so
grossly misstated because IBM rose +3.71 to 94.05. Revenues
from global services, 44% of IBM total revenue, increased
+8% to $11.4 billion. However, the revenue gain for services
was ENTIRELY due to currency translation. Software revenues
grew +12% on the surface but only +2% without the currency
benefit. Despite the strong earnings and strong gain in
stock price I would not be surprised to see some weakness
ahead as the numbers are reviewed. The gains on Thursday
were obviously on strong short covering due to the headline
number. Traders did not suddenly decide to buy 20 million
shares just because they beat estimates by six cents on
currency translation. I read the earnings report forward
and backward and I cannot find ANY statement of how much
of the EPS was due to currency translation. I guess they
would rather we not know. Keep an eye on IBM over the next
couple weeks.

After the bell today we saw earnings from JNPR, SUNW, CREE,
RMBS and TMTA. All met or beat estimates. CREE beat estimates
by +2 cents and raised guidance. The chip sector had started
the day out in the hole after Intel and a sector downgrade
by SG Cowen. Smith Barney removed Intel from their focus list
and added to the opening depression. CREE helped to change
that sentiment with their guidance. CREE upped guidance for
the current quarter to 17-19 cents per share when analysts
were only expecting 15 cents.

RMBS beat the street by three cents and said revenue for the
current quarter would be slightly higher. TMTA posted a loss
of -13 cents after items and inline with estimates. They
guided analysts to a loss of 11-12 cents for the current
quarter.

The big guns were SUNW and JNPR. SUNW posted a smaller than
expected loss but they refused to give any guidance. They
said that business was pretty much on track and they had
seen some upside surprise in the 4Q. CFO McGowan said the
+14% sequential growth was the best quarter since 1998. The
markets did not react strongly to Sun's earnings due to the
lack of guidance. Scott McNealy did take a shot at IBM and
their optimistic outlook. He said IBM must have a lot of
economists on staff whose salaries are getting bundled into
the price of IBM products. He said he couldn't see the future
and unlike IBM he cannot predict future economic recovery.

JNPR was the star of the after hours earnings show. They
beat estimates by +2 cents and said they expect to easily
beat analyst estimates for the 1Q. Whoa! JNPR said they
expect to make +8 cents for the 1Q and that is +3 cents
over current estimates. The conference call was positive
and very upbeat. It is 1999 all over again except that
customers are buying only what they need when they need it
and that is keeping the sales healthy on an ongoing basis.
JNPR has recently signed some big contracts and has partnered
with Lucent to produce products helping them both. Business
is good but they are trying not to get too excited just in
case it changes. JNPR was the leading reason for an upsurge
in futures after the close and they were still moving up at
8:PM.

Intel said they were seeing an uptick in enterprise purchases
and IT budgets were increasing. IBM suggested they were finally
seeing the first signs of a real IT recovery. They had said
last quarter that they were not. CREE upgraded guidance and
JNPR hinted that they might double the estimates. Sure looks
like the bulls are back.

Happy days are here again seems to be the common thread from
tech earnings, manufacturing surveys and inflation gauges.
The Fed is on hold for the rest of 2004 or so the current
conventional wisdom says. Bonds are moving up again and
yields on the ten year note closed at 3.97% and a 3-month
low. What is wrong with this picture?

Even with all the good news the Dow gained barely +15 points
and the Nasdaq finished in the red. That is actually good
news considering the gap and crap at the open. The less than
expected guidance from last nights earnings prompted a sell
the news event that knocked the Dow back below 10500 and the
Nasdaq back to 2088 before the buying began. The morning drop
was swift and the afternoon rebound was strong but slower.

Unfortunately the internals do not show the same strength.
Volume was equally split between advancing and declining
and it was heavy. Advancing and declining issues were even.
The Dow, Nasdaq, Russell and Wilshire all set new 52-week
highs by a handful of points but pulled back again at the
close. The pullback was no surprise with more tech earnings
on tap. After the morning drop I was surprised the pullback
was not stronger on fear of those earnings.

We are poised to breakout of the recent resistance highs.
It is the third week of January and we have traded generally
within 100 points of 10500 for the entire month. There has
been no historical January dip and time is running out.
Friday is option expiration and Monday is an exchange
holiday. Next week is a massive deluge of earnings but we
already know what they are going to say. All the factors
are in place for a strong surge or a strong drop. Neither
direction is a sure thing.

The churning at the resistance highs is a potential sign
of distribution. It represents indecision and proven by
the return of volatility. This is good because it means
the entire investing public is no longer bullish. There
is a growing undercurrent of confusion. If you bought
stocks over the last three months expecting strong earnings
in January then you got your wish. Now what? So far the
guidance has been for continued growth and those that were
planning on selling the bounce are now thinking about
holding until April. Those that were on the sidelines
hoping for a nice dip to buy are trapped. Chase the new
highs or continue sitting out? Tough question. I know the
minute I go long the top will be in place. If I remain
short we will go higher. Millions of others are thinking
the same thing tonight. This is creating a very shallow
bottom. You saw the drop on Tuesday to under Dow 10400. It
was bought with reckless abandon once traders were sure it
was not going deeper. Buyers are waiting.

The only plateau we have not crossed to the upside is the
Dow highs from 2002. The actual intraday high was 10673
but there was nearly a month of range bound trading between
10500 and 10650. Dow 10600-10650 is generally considered
the critical resistance range from that period. Ironically
we have traded for all of January in the same general range
between 10500 and 10600 with only a couple minor dips to
the downside. We have not yet tested 10600 completely with
all four attempts to move over 10580 turned back. This
means the jury is still out on any move higher. Until that
10600-10650 level is behind us we are still trapped in a
range. The January expiration cycle could have had something
to do with the gains since Tuesday's lows. In December we
saw the same thing. The markets had gone higher than expected
and option sellers were trapped with shorts that had to be
covered. Countless traders probably rolled those positions
forward thinking they could escape the trap for sure during
the January dip. With no dip in January the trap is squeezing
ever tighter.

With Friday an expiration day and Monday a holiday there
is no way to predict market direction. I am watching futures
rise as I type this and it looks like we are going to gap
open again tomorrow assuming GE earnings before the bell
are not unbelievably bad. Since they almost never miss or
warn I can't imagine that will happen. The three economic
reports are probably not serious market movers considering
the good news we have already seen this week. That leaves
us watching for expiration gyrations with some possible
profit taking before the close. On expiration Friday in
December we had a gap open, intraday slump and a strong
rally into the close. January expiration is a tossup and
a day best watched from the sidelines. Entering new plays
could be very risky. There is also the risk of being long
over a three day weekend. Sounds like a good day to plan
your trades for next week instead.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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FUTURES MARKETS
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Dollar Upphase
Jonathan Levinson

The US Dollar Index strengthened today, and commodities valued in
US Dollars, most notably gold, silver and natural gas, got
slammed along with foreign currencies.  That was the extent of
the anticipated "binary trade", as equities rockets both higher
and lower intraday, finishing near unchanged, while treasuries
advanced slightly.

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 spent the session moving higher, its first
day of this upphase spent entirely above the 86 level.  It
reversed course along its intraday uptrend above 86.60, but was
firm as of this writing.  We have buy signals and a new upphase
on the daily cycle oscillators, with resistance in the 88-89 area
above.  The CRB dived, dropping 3.27 to close at 264.75, led
lower by natural gas, heating oil, silver and gold futures.


Daily chart of February gold


Gold and silver got clocked today, with gold down double digits
and spending much of the session below 410, finishing lower by
11.10 or 2.64% at 409.30.  An ugly 3 black crows formation shows
downside acceleration, and the daily cycle downphase is so far
sharp and strong.  I've outlined preliminary support below, with
the bottom rung at 368 as the downside bear wedge target.  I
don't know whether that level will get tested or not, but a
mistake that I've made in the past has been impatiently rushing
into positions about which I had felt bullish.  The HUI and XAU
bounced from their intraday lows, and it's possible that gold
will continue trending higher either from here or from upper
support levels.  However, there are fresh sell signals on the
extended daily cycle oscillators and a sharp, textbook bear wedge
breakout.  Bullish on gold as I am, I remain cautious here.  For
the day, XAU dropped 4.03% or 4.09 points to close at 97.34, HUI
-4.07% or 9.28 to close at 218.97.


Daily chart of the ten year note yield


Bonds extended their rally today, helped along by a net surplus
of 4.25B in various duration repos.  Ten year note yields dropped
1.5 basis points to 3.971%, a .38% drop for the day, inching
ever closer to support at 3.90%.  The daily cycle downphase
remains well-established here, and a steady advance in treasuries
is underway.


Daily NQ candles


The NQ had a wide ranging doji day as the herd dashed first
lower, and then ran almost straight to the day and rally highs
before fading lower in the last hour.  NQ finished lower by .50
at 1537.  Lower rising trendline support was tested and briefly
broken on the spike to 1516, but the breach didn't last long.
The close near unchanged leaves traders holding a question mark
as to whether the current sideways fade within the rising channel
is a bull flag or the beginning of the end.  So long as support
above 1515 holds, the bulls will continue to sit pretty, despite
the daily cycle rollover that has bears on the edge of their
collective seat.  While rising channel support is now no lower
that 1520, 1515 support has been persistent for the past week.


30 minute 20 day chart of the NQ


The 30 minute cycle continues to vacillate here in the range that
is either a bull flag consolidation or a distribution top.  A
third test of the highs was rejected again today, and the 30
minute cycle oscillator again aborted its downphase and then
lagged the sharp price bounce, again setting up a potential
bearish divergence.  Until the lower support at 1515 or
resistance at 1550 breaks, the signals on this timeframe will
continue to be uncertain and short-lived.  I expect a break of
either end of the range to be good for a decisive, directional
move.  Is the run in the dollar bullish for equities?  Is the
rally over or about to start a next wave up?  These are the
questions hanging in the balance of the current 35 point NQ
range.


Daily ES candles


The ES printed a bullish doji candle, traversing a 13.5 point
range but printing a higher low and higher high.  For the day, it
gained 2 points to close at 1133.25.  The expected short covering
rally on a break of 1133 didn't occur, with a reversal starting
from new 52 week highs.  Neither upper nor lower channel
trendlines were tested, and closing print was closer to the top
of the daily range than it was to the bottom.  Unless the ES
moves higher tomorrow, sell signals appear imminent on the daily
cycle oscillators, but I'm not inclined to hang too much weight
on that until we see a breakout move above the 1140 level or
below 1118.  The oscillators are merely telling us that a
downphase is due, and that if it doesn't start soon, the markets
will be trending higher.  As seen in the steep correction in gold
this week, the move can happen fast, and ES is now less extended
here than was gold at the beginning of the week.  Bulls need to
be careful, and I personally expect this break to the downside,
but until 1118 falls, the uptrend remains indisputably intact.


20 day 30 minute chart of the ES


It looked like an upside break from a consolidation beneath the
highs, right up until it keeled over.   The 30 minute chart shows
the uncertainty resolved to the upside, but the lack of
followthrough leaves the question open.  Resistance is now in the
1136-40 area, with support at 1130, 1123 and 1118.  The 30 minute
cycle has been unreliable for more than confirmation of short
cycle moves, because the range is too narrow to permit direction
moves to develop from its signals.  That said, ES left off on a
30 minute cycle upphase, which favors strength into tomorrow's
open.  As with the NQ, I await a break of either the upper or
lower range to guide us as to the next extended directional move.


150-tick ES


The upturn in the Keltner channels confirms the 30 minute cycle
upphase currently in progress, and the short cycle oscillators
are also headed higher.  Keltner support at 1127 should not be
broken heading into tomorrow's session.


Daily YM candles


The YM finished at 10552, up 42 or .40%, the strongest of the
equities.  Its daily cycle downphase has been good for no more
than a sideways drift, and my analysis is the same as for ES and
NQ.   This range is either a bull flag consolidation or a
distribution top, and a break of 10600 or 10300 will decide the
matter.


20 day 30 minute chart of the YM



The US Dollar Index continues to hold the key to the current
market action, with bonds strengthening alongside the dollar,
while commodities weaken.  Equities continue to defy this
intermarket analysis, but the usual op-ex machinations this week
confuse the matter.  There's a good possibility of tomorrow
printing a narrow day as option writers jockey for position
around preferred strike prices.  On the other hand, with maximum
pain strikes mostly lower, I'd expect any surprise moves to be to
the downside.  I'm hoping that next week provides us with a
definitive range break against which to measure the dollar
rally's impact on the equity indices.  As the dollar is looking
bullish from here at the start of a daily cycle upphase, any
continuing strength in equities would imply the next wave of
upside for stocks.


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INDEX TRADER SUMMARY
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Thinking about a 4-day weekend

After a whipsaw session that found the major indices being jerked
around and finishing relative unchanged, I'm thinking about a 4-
day weekend.

Markets will be closed on Monday in observance of Martin Luther
King Jr. Day, and with equity option expiration on the plate for
tomorrow, those traders that didn't get enough rest during their
Christmas to New Years holiday break, might think about taking
tomorrow off.

After two unsuccessful attempts to Toll Bros. (NYSE:TOL) $39.50
+1.07% bullish and getting stopped out just after the open, and
later in the day shorting the QQQ at $38.25 to get stopped out
minutes later at $38.36, I'm thinking a visit to the chiropractor
tomorrow to check out a case of whiplash is a good idea.

Economic data released today, though mostly ignored due to what I
truly feel was index option expiration, had various economic
indicators showing positive signs.

December consumer prices rose a tepid 0.2%, which was in line
with economists' forecast, but up from November's -0.2% decline.
The core rate, which factors out the more volatile food and
energy components edged up 0.1%, also matching economists'
forecast, and offsetting November's 0.1% decline.

The continued lack of any meaningful inflationary, or
deflationary indicators at the producer and consumer levels,
combined with a bounce in the dollar had gold and gold stocks
under strong selling pressure again today.  The AMEX Gold Bugs
Index ($HUI.X) 97.34 -4.03% closed at a 2-month low.  The U.S.
Dollar Index (dx00y) 86.55 +0.6%, hardly a picture of technical
strength, now approaches its trending lower 21-day SMA
(01/14/04).

Gold did see some late session firming after the December U.S.
Treasury Budget showed a -$16.2 billion deficit, which was wider
than economists' forecast of $13.0 billion.  The budget deficit
is currently $21 billion larger than a year ago.

Treasuries caught a slight bid on the news, with the benchmark
10-year Treasury YIELD ($TNX.X) finishing down 1.5 basis points
to close at 3.971%.

The regional New York Empire State Index improved for the ninth
month in a row, rising to 39.2 (consensus 35.0) from December's
upwardly revised 37.4 (prior 36.2).  The Federal Reserve Bank of
New York said respondents reported improved business conditions
and continued optimism, with nearly all those surveyed expecting
conditions to be the same or better six months from now.  The new
orders index rose to 36.13 in January from 35.19 in December,
while shipments climbed to 41.73 from 36.66.

Total retail sales for December rose 0.5%, which was below
economists' forecast of +0.8% and November's downwardly revised
+0.9% (prior +1.2%).  Excluding autos, December sales rose a
fractional 0.1%, also below economists' forecast for a 0.4% gain.
Some comments I read regarding December's lackluster ex-autos
data was that gift cards were very popular during the holiday
shopping season, and retailers can not book the sales of gift
card purchases until credits are redeemed by consumers.

Without success, I did try to look for any forecasts for January
retail sales, which might have economists factoring in gift card
redemptions, but I could not find a current economic forecast.

The S&P Retail Index (RLX.X) 377.79 +0.58% closed back above its
rounding lower 50-day SMA, but just above the mid-point of its
November high and December relative low.  Retailing Dow
components Wal-Mart (NYSE:WMT) $53.49 +0.65% edged up $0.35 per
share, while Home Depot (NYSE:HD) $35.43 -0.11% slipped lower by
$0.04 per share.

I received a very good question from a trader/investor the other
day regarding the recent buying in Treasuries, which has YIELD
falling, and the relationship with a sharply lower gold trade.
Is this a sign of coming negativity toward broader equities, and
perhaps the economy.

It might be, and I would only use these observations as a reason
to be disciplined with bullish trading in broader equities at
this time.  Not that we shouldn't be with the bullish %
indicators still at very high, but still very strong levels of
bullishness.

It has become somewhat obvious to this analyst (Jeff Bailey) that
the Fed isn't going to move on interest rates, until one of two
things happens.  The first and foremost is that it sees some type
of inflation, with the second observation being that the labor
market shows steady improvement.

I'm going back and looking at the AMEX Gold Bugs Index ($HUI.X)
here tonight, and noting the recent highs of 258, from which the
HUI.X appears to have double-topped at its December 2nd high of
258 and now witnessed a lower low.  My economic calendar shows
that on January 6th, November factory orders were released, and
showed a -1.4% decline, which was slightly below the -1.5%
decline economists had forecasted.  While it is my belief that a
market will accurately forecast, or predict future data, which
will either positively or negatively impact trade, I'm simply
benchmarking what appears to have been a key point of resistance
in the $HUI.X with economic reports released to all market
participants.

On January 6th, the benchmark 10-year YIELD ($TNX.X) was trading
4.30%, and while its decline in YIELD, spurred by buying, does
suggest a somewhat defensive posture from the bond market, it may
well be based on reiteration of Fed policy that the Fed Fund rate
is staying at 1.0% for "the foreseeable future."

One of the dynamics I've noted in past comments, is that during
the great bull market of the late 1990's gold fell sharply, while
Treasury YIELDS rose, matching the rise in equities.

The "killer" signal for equities decline seemed to be the
continued pummeling of gold, and renewed buying in Treasuries at
much higher YIELDS than found in recent months.

With the brief conversation of gold and bond relationship being
somewhat suspicious in that the major equity indices are not
showing any real sign of meaningful weakness, we should still
observe today's trade with the thought that it may have been
highly manipulated due to index option expiration.

I agree with those investors that this week's trade may have been
somewhat influenced by index and stock expiration, which should
keep traders and investors disciplined with our stops.

I would use the recent sharp decline in gold, along with a lower
Treasury YIELD trade as an alert for weakness in the major equity
indices, but then be looking for some type of technical
confirmation that weakness is actually being observed.

Tonight I'm going to set a downside YIELD alert on my 10-year
YIELD ($TNX.X) chart at its inflection point low of 3.912% from
October 1, 2003, where if broken lower, may indeed be some type of
signal from the bond market that we should be alert to.  The
reason I'm not overly concerned with some of the renewed interest
that Treasuries are finding right now is that on September 30,
2003, the SPX traded a relative low of 990.36 and closed 1,132.05
today.

I'm also monitoring the Pacholder High Yield Fund (PHF) $9.41
+0.10%, which is a closed-end "junk bond" fund, as it battles with
$9.50, but 52-week highs.  It's current YIELD based on last
month's $0.075 per share distribution (pays monthly) is 9.56%.

My thinking by following this security as a general representation
of "junk bonds" is that if the market perceives downside risk, it
doesn't care about a higher yield, if downside risk is perceived
as high.  The combined buying of Treasuries, which are backed by
the full faith and credit of the U.S. government, with the
observation of buying in a much riskier set of bonds (junk bonds)
gives the impression that income investors see some type of
acceptable risk/reward relative to where it currently seed Fed
interest rate policy heading.

Perhaps gold has started to say the same thing in recent weeks.

Market Snapshot / Internals - 01/15/04 Close



The major indices finished just about where they ended
Wednesday's session and closing A/D lines were just about even.
Volumes were brisk and heavy, which we might expect on an Index
expiration.  A quick review of my buy/sell premium chart on 5-
minute intervals has me counting 5 buy program premium alerts and
6 sell program premium alerts during today's trade.  This to me
hints of some heavier institutional activity and not a surprise.

Tomorrow it will be stocks' turn for option expiration, along
with the QQQ, so I'd plan on some more volatility.

NH/NL breadth remains very bullish, with the NYSE 10-day ratio
now at 98.9% and NASDAQ NH/NL ratio at 98.6%.

You can probably pick up on the intra-day volatility in the point
change columns by the hour and it is notable how the
INDU/SPX/OEX/RUT.X/QQQ all finished positive with an Index
expiration, while the very broad NYSE and NASDAQ Composite
finished fractionally lower.

I make not of this, only because of some observations we have
been making regarding some of the option action in the current
month option contracts, combined with the Market Volatility Index
(VIX.X) 15.56 -7.1% suggested we might well see index expiration
have an impact into today's trade.

This week I concentrated more on the SPX, and while today's close
of 1,132.05 may be thought as "random" its close is right between
our MONTHLY R1 and WEEKLY R1 and today's DAILY R1 correlation
found in last night's wrap.

I made two trading "mistakes" today.  One at the open in TOL, as
the SPX was nudging just above 1,133.  I traded long and you can
see from the intra-day internals what took place by 11:00 AM EST.
Then later in the day, I "wised up" and when the QQQ rallied back
to its correlative levels of pivot matrix resistance of $38.25, I
shorted with a stop placed tight at the 52-week high, was
promptly stopped out, before the QQQ fell back lower.

I've been known to make a few trading mistakes that result in
losses, and mistakes I seem to be willing to make time and time
again is to initiate trades during option expiration.  It won't
be the first, it won't be the last, and when I do trade at option
expiration, I expect volatility, but will always use a tight
stop.

Pivot Analysis Matrix -



Today's e-mini S&P futures (es04h) settlement above my fitted
retracement level of 1,113.25 gives a bullish bias into
tomorrow's trade, and has me currently looking at a cash (SPX)
1,132.05 +0.13% trade potential to its WEEKLY R2 1,144.19 and
correlative DAILY R2 of 1,143.83.

I've noted in pink today's HIGH on the OEX was smack on its
WEEKLY R1, and the trigger for upside potential to SPX WEEKLY R2
is an OEX break above that high, where OEX now shows some
tentative (dashed green) early support at the MONTHLY R1 and
DAILY Pivot.

I marked today's LOW in the SPX and tomorrow's DAILY S1 as a
level I think really needs to hold some support.  It was this
1,125 level where the bulk of my observations regarding heavy
option trading into index expiration was taking place.  For me,
this becomes a rather important near-term level of support if
bullish traders are committing new bullish capital to these
markets.

The ONE thing I think traders need to be careful of right now, is
that I really do think there has been some scrambling by
institutions to "get long" in an attempt to square up on some
calls written previously at 1,125 and above, which may create
some artificial bullishness.  What bulls need to be careful of is
that this "artificial" bullishness, if it exists, doesn't unwind
itself early next week after expiration.

For bears, they've got the same problem tonight that has been a
concern for months.  52-week highs and limited overhead supply of
stock.

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



1,125, 1,125, 1,125 keeps showing up in recent sessions.  Even
that very short-term downward trend from the January 9th relative
high, which was firmly broken to the upside late Wednesday,
served support at 1,125 on a pullback test early this morning.

With futures closing above my bullish bias level, I think there's
enough upside emphasis to have the SPX trading 1,144-1,145
tomorrow.

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



Here's a 10-minute interval chart which shows this weeks trade.
I wanted to brink in the observation of the downward trend from
the recent 52-week high, and when broken, how it serves support
this morning.

While the Pivot Levels give us levels to be looking for
institutional program buying and selling levels, these basic
trends give some insight as to what other market participants
have been doing.  My best guess is there were some shorts playing
trend, maybe thinking of a 550 OEX settlement, but when trend is
broken and overhead supply is limited, a bear will turn on a time
and look to buy a retest of the trend.

Dow Industrials (INDU) Chart - Daily Intervals



Tomorrow's DAILY R2 at 10,656.82 adds another near-term level for
resistance in the INDU.  After we looked at a INDU point and
figure chart earlier this week and saw a 3-box reversal (finally)
it is now that I begin to wonder what is going to take place
early next week when option expiration is over.

If we're going to finally see a more meaningful pullback and
digestion of gains after the bold move above 9,900, then I'd have
to be looking for a spike higher, but a quick reversal back lower
type of trade.  With MACD fading a bit in a strong upward trend,
and Stochastics providing some near-term bullishness, traders
should be alert to such a trade.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals



QQQ option expiration is tomorrow and despite a lower trade in
INTC and YHOO, the Q's held tough on IBM's upbeat earnings and
comments.  An after-hours upside surprise and upward revisions to
prior guidance gives the Q's a lift in after-hours.  Aggressive
bulls can play for a squeeze, and important support becomes
visible at $37.55.

Those bulls not willing to risk downside to $37.55, I saw some
"bad ticks" lower at $37.95 today, which hinted to be of a near-
term "floor" of support, which a bull could look to leverage
from.

Jeff Bailey


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

Sell The What?
- J. Brown

Sell the News!  I've been warning that investors are likely to
sell the Q4 earnings news no matter how good the numbers are and
that's exactly what we got today.  Granted IBM was the exception
this morning but investors were caught unawares by the surprise
announcement when Big Blue was supposed to report next week.
Fellow headliners Intel, Yahoo and Apple were all lower on the
day but YHOO managed to pare its losses.

Overall the markets were mixed.  This heaviest selling hit the
XAU gold & silver index again with a 4% loss on Thursday.  This
is the fourth consecutive day of losses.  The index appears to
have broken its rising channel and a number of gold stocks
suddenly look like shorts breaking through support.  Is it a bear
trap or are gold bugs finally cashing in on the big ramp up in
gold with a nascent bounce in the dollar forming?

The XNG natural gas index was the second worst performing sector
on the session with a 1.88% drop.  The move doesn't look good for
natural gas stocks as the rally appears to have run out of gas
and the group looks ready to fall of a cliff.

Other notable losers were the XAL airlines index and the OIX and
OSX oil and oil services indices.  The XAL took a hit after DAL
dropped 5.59% on a downgrade from Deutsche bank.  Meanwhile the
OIX has been in a rocket-propelled rally higher and is finally
starting to see some profit taking.

Winners on the session were the NWX networking index (+1.77%),
the BIX banking index (+1.55%), the XBD broker-dealer index
(+1.21%) and the SOX semiconductor index (+1.61%).  The NWX was
up in anticipation of JNPR's earnings after the bell and the
company beat estimates by 2 cents.  Another strong day from
Nortel (NT) and Lucent (LU) didn't hurt the sector any.  The BIX
was up on the JPM-ONE merger news and the XBD was up on the
expectation for further consolidation and that means M&A fees.
Evidently Intel did a good enough job with their post-earnings
spin to give the SOX a lift even though shares of Intel closed
lower.

Today really was a toss up.  The urge to sell on yesterday's
earnings news was countered by last night's merger announcement
and IBM's stellar earnings announcement this morning.  Plus
positive economic data with another week of lower initial jobless
claims is a feel good boost for investor sentiment.  The tug-of-
war is evident in the NYSE advance-decline numbers with losers
edging out winners nearly 8 to 7.  The NASDAQ was closer with
advancers nosing past decliners 16 to 15.

Tomorrow we'll see more of the same but I believe investors may
still have a bullish bias.  GE's pre-market earnings report will
influence the tone of the session and likely overshadow the
handful of economic data with business inventories, industrial
production, capacity utilization and the Michigan sentiment
numbers.


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

Market Averages

DJIA ($INDU)

52-week High: 10592
52-week Low :  7416
Current     : 10553

Moving Averages:
(Simple)

 10-dma: 10507
 50-dma: 10068
200-dma:  9353



S&P 500 ($SPX)

52-week High: 1137
52-week Low :  788
Current     : 1132

Moving Averages:
(Simple)

 10-dma: 1124
 50-dma: 1078
200-dma: 1005



Nasdaq-100 ($NDX)

52-week High: 1545
52-week Low :  795
Current     : 1532

Moving Averages:
(Simple)

 10-dma: 1515
 50-dma: 1439
200-dma: 1298



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

Oh well...bears who had been hoping that the recent bottom in the
volatility indices may have indicated a top are disappointed once
again.  The VXO appears to be channeling lower with a steady
trend of lower highs.

CBOE Market Volatility Index (VIX) = 15.56 -1.19
CBOE Mkt Volatility old VIX  (VXO) = 16.23 -0.47
Nasdaq Volatility Index (VXN)      = 22.64 -0.53


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.66      1,083,341       715,875
Equity Only    0.52        843,879       442,894
OEX            0.93         50,558        46,803
QQQ            2.20         42,812        93,989


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.4    + 0     Bull Confirmed
NASDAQ-100    81.0    + 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: 1.15
10-dma: 1.00
21-dma: 0.94
55-dma: 1.05


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    1397      1581
Decliners    1581      1459

New Highs     294       218
New Lows        8         3

Up Volume   1148M     1070M
Down Vol.    982M     1079M

Total Vol.  2164M     2198M
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


NASDAQ-100

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

DOW JONES INDUSTRIAL

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                 Thursday 01-15-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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


****************
PICKS WE DROPPED
****************

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.


CALLS:
*****

Deluxe Corp. - DLX - close: 42.04 change: +0.03 stop: 40.50

To say the action in DLX has been boring would be misleading,
because it implies "some" action.  Since breaking above the
apparent H&S neckline last week, the stock made one foray up to
the 200-dma and since then has been comatose about the $42 level.
DLX may go up, and it may go down, but with the increasingly
tight range of the past week, it is becoming difficult to see
which way the next move will go and when it might arrive.
Trading blind is never a good idea, so we're going to pull the
plug near par and look to replace the play with something that
provides a bit of visibility.

Picked on January 6th at     $42.30
Change since picked:          -0.26
Earnings Date               1/29/04 (confirmed)
Average Daily Volume =        331 K
Chart =



PUTS:
*****

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

There's no nice way to say it -- Monday's dip below our $69.70
trigger on our CFC play was (in hindsight) a clear bear trap and
the jaws slammed shut with yesterday's strong rally up to the 10-
dma and only tightened on Thursday with the surge above the $74
level.  Despite the fact that CFC did close fractionally below
our stop, it is still too much of a stretch to say it makes sense
to hold the play in the face of a rising market, strong
financials and falling mortgage rates.  We'll take our lumps here
and drop coverage on CFC tonight.

Picked on January 8th at      $70.95
Change since picked:           +2.71
Earnings Date                1/27/04 (confirmed)
Average Daily Volume =      1.84 mln
Chart =



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Financial global presence and the convenience of one group for
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********************
PLAY UPDATES - CALLS
********************

Amazon.com - AMZN - close: 56.18 chg: +0.38 stop: 51.25*new*

Anticipation in front of Yahoo's earnings yesterday was enough to
push shares of AMZN up and over the $55.00 mark and our trigger
at $55.01.  The excitement continued after everyone ooh'd and
ah'd over YHOO's strong revenue numbers.  It is that pre-earnings
excitement that should keep the rally alive for AMZN.  Granted
the stock looks short-term overbought up five days in a row and
could be due for a dip but odds are that dip will be bought.  We
are expecting some resistance at $57.50 but the tease of AMZN
turning in exceptional numbers with 2003 as the strongest year
for online sales to date should be too much to hold the stock
back for long.  We're raising our stop loss to 51.25.

Picked on January 14 at $55.01
Change since picked:    + 1.17
Earnings Date         01/27/04 (confirmed)
Average Daily Volume:       10 million
Chart =



---

Apollo Group - APOL - close: 73.97 change: +0.96 stop: 70.00*new*

We couldn't have asked for anything more from our APOL play, as
the stock rose to kiss the $73 level yesterday and then blasted
through that resistance this morning.  As it pushed through
$73.25, our entry trigger was satisfied and momentum traders had
the all-clear signal.  Rising to the $74.50 area early in the
day, the stock then spent the remainder of the session relaxing
off those highs and it looks like we could be setting up for the
lower-risk entry on a rebound from the $73 area as old resistance
acts as new support.  Our stop was initially placed down at
$68.50 to give APOL room to move before staging the breakout to
new highs.  Now that we have that hurdle out of the way, we can
raise our stop to $70, which is just below the last mild dip.
Note that the 20-dma ($69.98) will cross through that level
tomorrow, providing one more level of protection for our stop.

Picked on January 13th at    $72.63
Change since picked:          +1.34
Earnings Date               3/18/04 (unconfirmed)
Average Daily Volume =     2.04 mln
Chart =


---


Quest Diagnostic - DGX - close: 76.78 chg: +0.91 stop: 72.50 *new*

Finally!  We've been waiting for shares of DGX to make a move and
it occurred on Wednesday.  The stock shot higher on zero news to
breakout above resistance at $75.00.  We got confirmation of that
move with another decent gain today.  The rally higher is
certainly encouraging and there is little to slow the stock down
between here and its next obstacle at $84.00 except round-number
resistance at $80.00.  We would be a little cautious on new
entries and another bounce from the $75 mark may be a good bet.
In the mean time we're going to raise our stop loss to $72.50.

Picked on December 30 at $72.95
Change since picked:     + 3.83
Earnings Date          01/27/03 (confirmed)
Average Daily Volume:      836  thousand
Chart =


---

General Dynamics - GD - close: 92.33 chg: -0.73 stop: 89.50

Slow and steady is the ascent for shares of GD.  We're not
complaining though.  The DFI defense index inched above its
April-May 2002 highs this week and the group is climbing in "blue
sky" territory.  Actually, the trend in GD has been very orderly
and the stock is still in a rising channel.  Dips to $91 are
probably the best entry point nowadays and conservative traders
might want to consider stops under the $90 mark.  We're going to
leave our stop at 89.50 for now.

Picked on December 21 at $88.78
Change since picked:     + 3.55
Earnings Date          01/21/04 (unconfirmed)
Average Daily Volume:      1.0  million
Chart =


---

Gilead Sciences - GILD - cls: 61.95 chng: +0.92 stop: 59.50*new*

For more than a week now, GILD has been criss-crossing over the
same territory, providing solid consolidation of the breakout
over $60.  We won't know until price action shows the answer
whether this is consolidation before another upward leg or a
near-term topping formation.  But it does feel like a
consolidation before another rally leg.  Look how consistently
intraday support is being found near the $60.50 level - there are
definitely buyers lying in wait at that former resistance level.
Those willing to buy dips will want to enter on successive dips
near that level, while those looking to enter on strength still
need to wait for the breakout over $64.  Once clear of that
resistance, look for next resistance at $66 at the top of the
gap.  We'll continue to target an ultimate move to $68, but
remember that time is running out.  GILD is set to report
earnings on January 29th, so there's only 2 weeks left for the
buyers to get the job done.  Note that we've raised our stop to
$59.50 tonight.  That is just below strong support at the top of
the broken wedge, as well as the 20-dma ($59.74) and neither of
those levels should be breached if GILD really does have upside
potential.

Picked on December 21st at   $59.40
Change since picked:          +2.55
Earnings Date               1/29/04 (confirmed)
Average Daily Volume =     3.70 mln
Chart =


---

Maxim Integrated - MXIM - cls: 55.52 chg: +0.74 stop: 51.45

The chip sector rallied strongly ahead of Intel's earnings report
and the sell off in shares of Intel after the news was highly
expected.  Fortunately, Intel's positive spin on the quarter was
enough to keep the rally alive for MXIM.  We're a little cautious
on new positions but aggressive traders might want to consider
bounces from the $53.50-54.00 range.  Conservative traders may
want to consider adjusting their stops toward the same range.
There is no change in our stop.

Picked on January 06 at $51.89
Change since picked:    + 3.63
Earnings Date         02/05/04 (unconfirmed)
Average Daily Volume:      5.4 million
Chart =


---

Saint Jude Medical - STJ - close: 63.63 change: +0.07 stop: 59.99

The slow upward drift for shares of STJ continues and hopefully
we'll see a more decisive close over the $64.00 level soon.
There was an interesting article detailing the general under-
awareness of heart disease in woman.  Heart attacks kill six
times more women than breast cancer in this country yet only 20%
of the ICD's given to patients are installed in women.  The Dow
Jones report went on to detail that the implantable cardiac
defibrillator (ICD) market could see a growth spurt as women
become more aware and doctors better diagnose how heart attack
symptoms vary from men to women.  Looking back to STJ we remain
cautious until the stock can close above the $64 level.

Picked on January 12 at $64.01
Change since picked:    - 0.38
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      1.4 million
Chart =



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

Morgan Stanley - MWD - close: 59.81 chg: +1.19 stop: 56.75

Company Description:
Morgan Stanley is a global financial services firm and a market
leader in securities, investment management and credit services.
With more than 600 offices in 28 countries, Morgan Stanley
connects people, ideas and capital to help clients achieve their
financial aspirations. (source: company press release)

Why We Like It:
The JPMorgan (JPM) and Bank One (ONE) merger has set the
financial and broker-dealer sectors on fire.  Okay, "on fire" may
be melodramatic but there were a large number of new highs and
breakouts today after last night's announcement.  As a matter of
fact the XBD broker-dealer index closed near its all-time highs.
Pacing the leaders is MWD who broke out of its recent
consolidation.  The revival of M&A activity has been a cash cow
for the major Wall Street firms like MWD and the momentum appears
to be picking up steam.  Case in point, China plans to have 9
IPOs this year worth upwards of $13 billion and MWD is considered
a front runner for the underwriting.

Plus, investors might be feeling a bit "safer" with MWD after the
company's $50 million settlement last November with the SEC over
some fraud charges.  Those familiar with the case will remember
that MWD failed to disclose some promotional "arrangements" with
16 funds in its Partners plan.  We like the breakout today on
strong volume and believe MWD can trade to the $65 level before
hitting any major resistance.  We'll start the play with a stop
loss at $56.75.

Suggested Options:
We like the February and April 55 and 60 calls but our favorite
is the February 55's.

BUY CALL FEB 55*MWD-BK OI=  758 at $5.60 SL=3.25
BUY CALL FEB 60 MWD-BL OI= 4460 at $1.75 SL=0.85
BUY CALL FEB 65 MWD-BM OI= 1450 at $0.40 SL= --
BUY CALL APR 60 MWD-DL OI=18588 at $2.95 SL=1.50
BUY CALL APR 65 MWD-DM OI= 9255 at $1.00 SL=0.50

Annotated Chart:



Picked on January 15 at $59.81
Change since picked:    + 0.00
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million
Chart =



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Adobe Systems - ADBE - close: 38.45 change: +1.30 stop: 40.00

The market action this week has been truly astounding, but all it
goes to prove is that sentiment is still VERY bullish.  Last
week, ADBE gave one of the best bearish breakdown chart patterns
we've seen for several months when it broke longstanding support
at $37.50 and the 200-dma.  But rather than continuing downwards,
the stock clung to the underside of that 200-dma while the
oscillators made their way towards oversold.  Thursday's strong
rebound does not bode well for our play, as it makes it very
likely that our $40 stop is likely to be tested, perhaps as early
as tomorrow.  Use the $39 level as a gauge of strength before
considering rollover entries ahead of the weekend.  Both the 20-
dma and the 30-dma are converged near this level and if price
pushes through those measures of resistance, we'd suggest
abstaining from new entries until price drops back below $38.
Traders looking to enter on weakness will need to wait for a
break to new lows to enter, and that means a drop below $36.25.

Picked on January 11th at     $37.12
Change since picked:           +1.33
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.33 mln
Chart =


---

Diamonds Trust - DIA - cls: 105.96 chng: +0.29 stop: 106.25

Was Tuesday's dip the best the bears could muster?  If so, then
it looks like our attempt to play the downside in the broad
market using the DIA is doomed to failure.  Following a $10 point
rally, the DIA pulled back roughly $2, tested its 20-dma and
rebounded strongly.  We're now in the heart of earnings season
and despite some disappointments, the market has continued to be
resilient, with each dip finding fresh legions of buyers.
Hitting an intraday high of $106.12 on Thursday, the play came
very close to triggering our $106.25 stop.  We were looking for a
failed rebound from the $105 area to provide continuation entries
after Tuesday's drop, but with price right back near its recent
highs, it looks like the rebound is not going to fail.
Aggressive traders can certainly consider new entries on a
rollover from current levels, but it must be considered high risk
until price finally punctures the 20-dma ($104.38).  Momentum
traders will want to wait for a break below $103.75 (just under
Tuesday's intraday low) before playing.

Picked on January 8th at     $104.69
Change since picked:           +1.27
Earnings Date                    N/A
Average Daily Volume =      5.79 mln
Chart =



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

None


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The Option Investor Newsletter                 Thursday 01-15-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: The Volatility Continues
Traders Corner: Wanted: Traders With The "Right Stuff"


**********
WATCH LIST
**********

The Volatility Continues
___________________________________________________________________

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.
___________________________________________________________________


Black Box Corp - BBOX - close: 49.30 change: -0.30

WHAT TO WATCH:  Networking stock BBOX had a very strong run from
mid-December near $40 to over $51 a week ago.  Shares were
looking poised for a drop on profit taking but JNPR's positive
earnings announcement tonight may have given BBOX a reprieve.
BBOX might be an aggressive bullish play over $51.00 but we'll be
watching it for a breakdown under $49.00 (48.50).

Chart=


---

Infosys Technologies - INFY - close: 92.90 change: -2.95

WHAT TO WATCH:  Uh-oh.  Indian software stock INFY has faded from
the $101 level back towards $90 after breaking minor support at
$95 today.  The stock should have support at $90.00 (old
resistance becomes new support) but it make take some faith to
buy the dip.  We'll be watching for a bounce from $90 but if INFY
breaks its simple 50-dma (nearing $88) it will immediately become
a short-term bearish candidate.

Chart=


---

United Online - UNTD - close: 20.02 change: +1.22

WHAT TO WATCH:  It's been a very good week for UNTD.  The stock
has rallied strongly on volume from under its 200-dma to breakout
above resistance at $19 and $20.  The actual close above the $20
mark is encouraging but unfortunately the stock has run headlong
into overhead resistance on its P&F chart.  We're cautious and
not willing to chase it right here but will be monitoring it
ahead of its February 4th earnings report.

Chart=


---

Goldman Sachs - GS - close: 101.14 change: +1.76

WHAT TO WATCH:  We strongly considered adding GS to the OI call
play list this evening on its high volume breakout above the $100
level.  The JPM-ONE merger news has set the broker-dealer sector
to new highs as investors speculate on further consolidation in
the industry.  More mergers means more M&A fees for firms like
GS.  Bulls can probably target a move to $110 but look for some
resistance at $105.

Chart=



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

LU $4.47 +0.40 - Lucent jumped almost 10% today on an upgrade
from Lehman Brothers.  Shares are up almost 60% YTD already.

COF $67.10 +2.31 - COF is breaking out above resistance as the
entire financial sector bursts higher on the JPM-ONE merger news.

PVN $12.18 +0.49 - COF's smaller rival is also breaking out from
its recent consolidation but PVN still has a lid on the stock
price at $13.00.


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

Wanted: Traders With The "Right Stuff"
By Mike Parnos, Investing With Attitude

Wanted: Option traders.  Will train bright, well-grounded, astute,
reality-based individuals who want to learn skills that will last
a lifetime.  Must have the "right stuff."

Successful traders are made, not born.  At the Couch Potato
Trading Institute, there is a recipe for success.  Ingredients
include experience, reasoning ability, emotional detachment,
maturity, awareness, common sense, self-discipline, courage,
vision, introspection, a sense of humor, desire, commitment, and a
work ethic.  Now, that's the "right stuff."

Not The "Right Stuff"
It seems I offended somebody with my column last Sunday.
Actually, it may have been a few somebodies, but who's counting?
It wasn't intentional – just an innocent humorous reference that
most secure, well-adjusted people would have either smiled at or
fluffed off, but certainly never taken personally.   The world, in
general, has to learn to lighten up a bit – especially traders.
There are times in life when one's sacred cows may be portrayed as
ground beef.  Them ain't "fightin' words."   They're just words.
Get over it.  Life's too short.  Pick your battles. When you lose
your cool, you'll lose your money.  It's a certainty.

Remember when your children used to whine, "He called me a name?"
Once we get past 8-years old, aren't we supposed to grow a
slightly thicker skin?  Some children demonstrate their inner
strength when they chant, "Sticks and stones may break my bones,
but names will never hurt me."  It's worrisome when some adults
don't display the same fortitude.  That's simply not the "right
stuff."

The Successful Trader
On the other hand, a successful trader must be able to put things
into perspective, to have a sense of humor and to not take himself
too seriously.  He has to be able to assimilate information,
qualify it, quantify it, recognize it for what it is, and either
discard it as frivolous or put it to good use.   Enough said.  For
those who DO have the "right stuff," let's get back to the tasks
at hand -- learning and making money.
_________________________________________________________________

A Nice Big Silver Lining
OK, so we took a hit on a few positions.  But, it appears two of
our trades worked out very well.  The XAU Iron Condor saw the
index violate the range, but it bounced off nearby resistance and
returned to the range to hopefully expire without incident.  The
XAU has moved down the last three days – a lot.  But I think we'll
be OK.

Our OEX Credit Spread Boogie finished in comfortably profitable
territory as we watch the market trend continue.  Our 535/505
bull-put spread will expire out of the money – by more than 20
points.
____________________________________________________________

February Position Preview
Here are a few things I'm looking at for potential CPTI trades for
the February option cycle.  Remember, February is a five-week
option month.

As of yesterday (Wednesday), I was seriously thinking about doing
another Iron Condor on the XAU, but the gold/silver index has
tanked something serious.  We'll see where it ends up after
Friday's close.

The OEX Credit Spread Boogie worked out very nicely.  At the
moment, even though the trend seems rather extended, there's no
end in sight.  So, we'll probably initiate another position.  I'm
looking at a 560/535 bull put spread for a credit of about $6.50 –
based on Thursday's closing prices.

Also, check out the MNX index.  It's a mini version of the NDX
index that tracks the NASDAQ 100.  The NDX has 25-point strike
prices and is exciting to trade – a little too exciting for some.
So, we should probably dial it down a little and take the more
conservative path.  The MNX, strangely enough, has some 2 1/2
point strike prices.

At the moment, I'm looking at an MNX Iron Condor with a 142.50/140
bull put spread (20 contracts) and a 165/170 bear call spread (10
contracts).  The credit should be about $800 for each side or
about $1,600 for both.  It's only a $5,000 exposure and a 22-1/2
point max profit range.

I looked at the SPX options and, right now, they don't have any
February strikes over 1175.  With the SPX trading at 1132, that's
not near enough room on the upside for an Iron Condor that would
let us sleep at night.

For a seemingly safe play, our old friend BBH might fill the bill.
I'm considering an Iron Condor with $130/$125 bull put spread and
a $145/$150 bear call spread.  It's a 15-point range with a credit
of about $1.10.

Again, keep in mind that we're trying to make money using neutral
strategies in a trending market.  It ain't easy.  We're hoping
that the market will come to its senses and at least pause for a
while.  Also, keep in mind that if you're uncomfortable trading in
this environment, it's perfectly OK to sit out a month.  Me?  I've
got to put these "hypothetical" trades out there for "educational"
purposes, of course.
____________________________________________________________

JANUARY CPTI POSITIONS
Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1532.00
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 – 550.65
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 – $97.34
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 -- $38.14
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 -- $38.14
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 – 560.42
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.


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

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Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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