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Daily Newsletter, Tuesday, 01/27/2004

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The Option Investor Newsletter                 Tuesday 01-27-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Volatility Returns
Futures Markets: The Downphase That Could
Index Trader Wrap: Tech bulls get caught with their SOX down
Market Sentiment: No Shortage


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      01-27-2004           High     Low     Volume Advance/Decline
DJIA    10609.92 - 92.60 10701.77 10609.92 2.10 bln   1405/1835
NASDAQ   2116.04 - 37.80  2152.75  2116.04 2.14 bln   1336/1936
S&P 100   567.15 -  6.29   573.44   567.15   Totals   2741/3771
S&P 500  1144.05 - 11.32  1155.37  1144.05 
W5000   11177.42 -104.40 11281.80 11177.42
RUS 2000  595.17 -  6.33   601.50   594.93 
DJ TRANS 3041.22 - 25.50  3074.18  3033.34   
VIX        15.35 +  0.80    15.44    14.74
VXO (VIX-O)15.32 +  1.00    15.41    14.75
VXN        23.03 +  2.04    23.07    21.60 
Total Volume 4,634M
Total UpVol  1,533M
Total DnVol  3,054M
Total Adv  3139
Total Dcl  4258
52wk Highs  905
52wk Lows     6
TRIN       1.19
NAZTRIN    2.02
PUT/CALL   0.87
************************************************************

Volatility Returns

After a +134 point gain on Monday to a new two year high the
Dow slipped -92 today as put buyers outweighed call buyers 
almost 3:1. The Nasdaq gave back all its gains from Monday
and returned to the low 2100s on weakness in the semiconductor
sector. Volatility may have been higher today but it is still
at relatively low levels. Considering our markets are at two
year highs this is not surprising. When the bulls are running
the volatility gets trampled.

Dow Chart - 120 min

 
Nasdaq Chart - Daily

 


The economic calendar was slim today with only two reports.
The Chain Store Sales showed a jump of +1.1% for the week
after three weeks of decline. The Southwest was the strongest
region as blizzard conditions and severe cold hampered those
consumers in the Northeast. The ICSC raised it estimates for
all of January to a gain of +4.0% to +4.5%. This is a +1% 
gain over the prior +3.0% to +3.5% estimates. 

The Consumer Confidence hit an 18 month high at 96.8 but 
was less than consensus expectations at 98.5. The December 
decline was reversed on the strength of a gain in the 
present conditions component. Not all components were rosy.
Plans for new purchases slipped slightly and availability
of jobs only increased slightly. The lower than expected
headline number may have been influenced by the blizzards
across the country. Fighting the elements tends to depress
consumers and makes them less receptive to shopping. We all
know shopping is a mood elevator for at least half the
population. Confidence should continue to rise as long as
employment continue to improve. Once the tax refunds start
flowing the urge to spend will also grow.

Kraft (NYSE:KFT) did not help confidence when they announced
they were cutting -6,000 jobs including 1,300 salaried jobs
over the next three years. They will take a charge that will
impact their earnings for these layoffs. 

The news was all about Martha Stewart and earnings today. 
Since we are all Martha'ed out I will not bore you with 
what she had for lunch or how many powder room breaks she
had. We will concentrate instead on the real news with 
several Dow stocks announcing earnings. 

Merck (NYSE:MRK) announced a fourth quarter profit that 
fell -26% due to a decline in sales and charges for recent
job cuts. MRK posted +62 cents per share and reaffirmed its
2004 full year estimates. MRK traded up fractionally for
the day and up +1.50 for the week to $47.35. It looks like
new life is coming back into the stock after being a Dow
dog for the last six months. Drug stocks are normally
defensive and MRK could be benefiting from the rotation
out of chips. 

Another Dow component, DuPont, lost -50 cents despite 
beating the street and issuing an upbeat outlook for the
year. SBC lost -74 cents to close at $26 after posting a
drop in profits and rising employee costs. The results
were inline with estimates and were uninspiring. Investors
are watching the decline in the telecom sector as each of
the major players reports. Wire lines are dropping and 
with them the monthly and long distance revenues. 

McDonalds gained +17 cents inline with expectations on an
increase in sales due to a restructured menu. Salads and
chicken are beating out hamburgers as the high profit 
items. 

The biggest loser on the Dow was Caterpillar despite a
surge in revenue to $6.47B from $5.38B and beating estimates
by +3 cents. The drop in stock price was due to the retirement
of their CEO and new guidance. The company said they did
expect 2004 earnings to jump +40% and revenue +12%. They
did not give short term guidance as they had in the past 
and simply said 2004 will be strong. This prompted some
analysts to suggest they were hiding a weak first half. 
Also, much of their gains were due to currency translation
benefits from the weak dollar. 

Other major earnings of note with misses or lowered 
guidance included BK, LMT, CNF, RTN and DJ. After the bell
we saw another flurry of tech earnings and most were positive.

AMZN est +0.29, act = +0.29 inline, raised guidance  
BRCM est +0.16, act = +0.19 beat 
FLEX est +0.14, act = +0.17 beat, raised guidance +3 cents 
AFCI est +0.09, act = +0.10 beat    
ADVP est +0.55, act = +0.55 inline 
EFII est +0.21, act = +0.27 beat
CYMI est +0.00, act = +0.04 beat   
ERTS est +1.20, act = +1.26 beat  
MENT est +0.31, act = +0.30 miss   
MLNM est -0.31, act = -0.30 beat     
MGAM est +0.48, act = +0.48 inline  
PXLW est +0.09, act = +0.06 miss  
NTIQ est -0.01, act = -0.04 miss     
HRS est +0.49, act = +0.50 beat
ELX est +0.23, act = +0.24 Raised guidance +2 cents
RHI est +0.03, act +0.03 inline
NET est +0.21, act +0.26 beat 
AV est +0.05, act +0.07 beat 


The two biggest newsmakers were AMZN and BRCM. Amazon did
report blowout 4Q revenue and its first ever back to back
quarterly profit. Proforma earnings were 29 cents and that
was inline with the consensus estimates. They raised the
Q1 revenue estimates to $1.39B to $1.49B and well above 
prior estimates at $1.32B. Unfortunately they did not 
provide profit estimates. Analysts are expecting +16 cents
for Q1 and with higher sales you would think they would be
inline or maybe even beat. Analysts were worried that 
margins may not be as good in the 1Q due to product mix. 
Also the company benefited greatly from currency translation
issues in the 4Q. $98 million in revenue and $6 million in
profit came from currency gains. With the decline in margins
and higher shipping costs there were plenty of questions 
for AMZN. They also said there was a disturbing rise in 
inventory levels which could be pointing to a slow down
in sales. AMZN traded down -$3 in after hours. 

BRCM beat the street by +4 cents but the stock dropped
sharply on news they were going to issue $750 million in
new stock or debt. That was quickly reversed when they 
raised guidance on the conference call and suggested sales
could grow as much as +10% in the 1Q. The +10% number works
out to $527 million and well above the prior estimate of
$463 million. The company said they saw substantial new
bookings late in the 4Q and early in the 1Q and that new
enterprise spending could provide a big opportunity. They
are planning on issuing 30 million new shares to enable
a future acquisition. Four companies bought more than
48% of Broadcom's output. Dell, Cisco, HPQ and Motorola
each bought more than 10% with HPQ the most at 15%.

MSFT dropped -55 cents on news that the EU may issue a
negative ruling against Microsoft and try to substantially
change the way Microsoft does business. This is old news
but the European Commission did confirm it was wrapping
up its investigation. The EC has a draft decision and those
are normally used to exercise leverage against the company
in advance of the final ruling. Microsoft said it was in
active talks to insure a positive resolution. Sounds like
they are in a tight spot and the EU/EC is applying the
screws. The EU has threatened to force Microsoft to strip
Media Player out of Windows to give RealNetwork and Apple
a more competitive opportunity.

Overall earnings have been very strong. The best in ten
years according to some analysts. First Call said earnings
were coming in at +25% so far and could rise to as much as
+27% as some smaller companies announce next week. This is
a very strong quarter and helped by a weak comparison to
Q4-2002. The average company beating estimates is beating
by +19% compared to an average of +6% in normal quarters.
The only problem is in the guidance. Because the good 
results have been expected for two months many stocks are
seeing their prices battered when they announce. When 
expectations are so high it takes almost super human
guidance to attract new buyers after the announcement. 
Guidance has been good with quite a few companies raising
their outlook but it has not been exceptional. 

SOX Chart - Daily

 

Some of the stocks getting hit the worst on good news have
been the semiconductor stocks. The sector is well off its
highs with the SOX dropping -7% in just the last five days.
This includes the monster gains from Monday's romp that
were completely erased on Tuesday. At 517 the SOX is very
close to ending the month with a loss. The high of 560 was
set back on the 12th. NVLS posted earnings on Monday night
and dropped -5.85 on Tuesday. KLAC lost -1.70, PHTN -3.66,
MXIM -3.05, CCMP and UTEK about -$3 each. SNDK continues
to sink lower with another -2.20 today. If the SOX is the
leading indicator for the Nasdaq then it is no surprise
that the Nasdaq gave back all its gains from Monday and
is down for the week with a -37 point drop today. There 
was a rumor making the rounds today that PMCS was seeing
an order slowdown from Cisco, which is its biggest 
customer.

Are we doomed to drop from here? Not necessarily. Remember
earnings are excellent. It is just that investor profits
are in the excellent category as well. Remember also that
we have a Fed meeting underway that will end at 2:15 
Wednesday afternoon. There is high risk that the Fed will
change its bias statement and traders are just taking some
profits off the table in advance. I am just surprised it 
did not happen on Monday. The afternoon buy program that
triggered the short squeeze was entirely out of character.
The bounce that ensued simply gave investors one more 
chance to exit at two year highs and dodge a fickle Fed 
statement. 

Tomorrow afternoon we will either get the "considerable
period" statement or we won't. With the market at two year
highs and earnings the best in ten years my bet is we get
a new bias. If they are ever going to get a free shot this
is it. The bullish sentiment is still so strong it is
nearly bulletproof. According to Fed watchers there is
almost no chance of a rate hike so they are playing the 
rate lottery with OTM options. As long as there is a 
"considerable period" statement they are looking at six
months before the Fed will hike rates. Should that 
statement disappear and language about strong economy and
rising employment appear in its place then bonds will die. 
By changing the statement they are loading the rate hike 
gun. It does not mean they are cocking it but just the 
presence of a loaded gun is enough to strike fear in the 
bond markets and by association the equity markets. Nobody
expects any hikes this year so this is all just positioning
and speculation but the best of all worlds is already priced
into the market. Any change in the bias could cause temporary
movement. That movement could be a couple hours or a couple
days but is not likely to be lasting. Bond yields have 
already spiked up over the last three days on fear in 
advance of the meeting. 

Any market shakeup should be brief based on the current
bullish sentiment. That sentiment could change at any time
but it won't be because the Fed says the economy is strong.
If it changes it will simply be due to the overbought 
conditions and lack of a catalyst to move higher. Let's
face it, Monday's move was very bullish. The Dow moved
over two year resistance highs to close at 10700. This
clears the way to 11,000-11,300 for the next serious 
resistance. The Tuesday drop held over 10600 and still 
in bullish territory. The flaw in Monday's rally was the
Nasdaq which stopped at 2150 resistance once again and the
Russell which stopped at 600 resistance. These are strong
levels for both indexes considering their overbought 
conditions.

The market drop on Tuesday was literally led by the SOX.
This sunk the Nasdaq and dragged IBM and INTC and the Dow
down with it. CAT did not help either. However, help is on
the way. The SOX got help from the BRCM earnings tonight 
and the 517 close is only +2 points above support at the 
50 dma. This is the key point to watch in the morning. As
long as the 50dma at 515 holds the Nasdaq is not going 
very much lower. The Nasdaq has strong support itself in 
the 2085 to 2110 range. We do not need to start worrying
until the Nasdaq trades below 2085. 

The Dow has strong support at 10600, 10500, 10400 and 
10300. We would have to see a serious trend change to
break all those levels. The biggest potholes in our future
are the Fed announcement at 2:15 and the GDP on Friday.
The economic calendar heats up beginning on Thursday and
continues into next week. Recently economics have been
market favorable and until that changes traders need not
fear the normal reporting cycle. The GDP has the biggest
potential. A number under +4.5% would be a shocker 
especially after the strong earnings. Analysts are now
expecting another blowout and that expectation could be
the biggest hurdle. The Fed will have advance notice of
the GDP in their meeting and will have already acted 
accordingly. 

Expect some volatility to appear when the Fed announcement
is made at 2:15 and then a choppy market the rest of the 
day regardless of the announcement. Sanity should return 
by Thursday but that does not mean the markets will be
directional. Friday is month end and window dressing 
should keep us in the current range if there are no 
economic disasters. For the rest of the week keep your 
eyes on the SOX and 515. As long as we do not stray too
far away from that level we are still in striking distance
of a new high. Should it break that level on good news then
profit taking could take it down to 475 with a pause at
500. Use it as your market guide and you will not be far
wrong. 

Enter Passively, Exit Aggressively. 

Jim Brown
Editor


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FUTURES MARKETS
***************

The Downphase That Could
Jonathan Levinson

An intraday downphase actually followed through today, with 
weakness in equities retracing most of yesterday's gains.  
Treasuries, gold and silver advanced as the US Dollar Index 
declined. 

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.

Chart of the US Dollar Index


The usual 3AM selling became a cascade when London opened and 
continued through most of the cash session, with the USD Index 
dropping over 10 basis points to trade the low 86.25 level as of 
this writing.  The selling was sufficient to cause the first 
suggestion of a pause in the daily cycle upphase but no sell 
signal has been given.  The move coincided with strength in 
metals and in FCOJ and coffee futures.  Silver led the CRB which 
was nevertheless lower by .18 at 267.09 on weakness in cotton, 
corn, soybeans and crude oil futures. 


Daily chart of February gold


February gold had a big day, printing a key upside reversal with 
a lower low and higher high above the recent session tops, with a 
high of 412.40.  The bounce came from a test of the rising 
support line and engulfed the losses of the past three sessions.  
The daily cycle downphase did not abort, but the Macd histogram 
is showing a bullish divergence.  412-3 was significant downside 
support and is now acting as resistance.  If that level breaks to 
the upside tomorrow, I expect to see the daily cycle downphase at 
least pause for the first time since it kicked off earlier this 
month.  For the day, February gold added 7.10 to close at 410.60, 
a 1.76% move.  March silver added 4.3% to close at 6.55.  XAU 
added 1.93%, HUI +2.54%.


Daily chart of the ten year note yield


Ten year notes rose strongly today, with the yield (TNX) dropping 
5.3 bps or 1.28% to close at 4.087%.  This retracement of 
yesterday's gains did not impede the daily cycle upphase, but 
another day like today might.  The current 4.08% level is 
confluence support below which a retest of 3.9% support cannot be 
ruled out.  But for the moment, the move looks like a retrace of 
recent gains in the yield within the context of a daily cycle 
upphase. 


Daily NQ candles


The NQ went out half a point above its session low, closing at 
1520 and below the rising channel trendline.  This break is 
significant, but bear in mind that it's only my trendline, and 
the 1515-20 area is strong support.  The wide-ranging move broke 
yesterday's low slightly and reignited the daily cycle downphase 
that had been in the process of aborting after yesterday's 
powerful run.  Below 1515, 1492 and then 1460 are the next 
significant supports.


30 minute 20 day chart of the NQ


Newcomers may not know one of my favorite chart patterns, named 
by a dear friend and mentor, "The Finger" formation.  The 
stoprunning panic blast higher doji-ed back down, retracing the 
entire move just as quickly.  The surprise here was that the 30 
minute cycle downphase actually played out fully for a change.  
The selling lined up with synchronous daily and 30 minute cycle 
downphases, optimal conditions for bearish trades.  The key 30 
minute cycle oscillators are now oversold, not yet reversing but 
in prime reversal territory, and this right on key support.  If 
it's going to bounce, this should be the place, but below 1515, 
the 30 minute oscillator will likely be trending and bears in 
control, for a change.  Bulls can look for aggressive entries 
around current levels but stops should be placed close beneath 
1515 in case the bottom falls out.


Daily ES candles


ES stopped right on the rising lower channel trendline at 1142, 
closing half a point above it.  Most of yesterday's gains were 
erased, as was the daily cycle uptick in the trending daily 
oscillators.  A move below 1140 would be an obvious channel 
break, but the failure of those tests since mid-December is also 
obvious.  On a daily basis, there's nothing to do here either 
way, as the ES closed on uptrend support.  Bulls will be looking 
to buy current levels with a stop nearby at 1140, while bears 
should wait to see the trendline fail with a break of 1140.


20 day 30 minute chart of the ES


The 30 minute cycle downphase is as oversold as it's been in 
weeks, with the ES resting right on rising trendline support.  
Support is currently at 1139-40, followed by strong support at 
1128-32.  While particularly dubious of the gains of recent 
weeks, it will take something special to break the current 1139-
40 support, and I'd be shocked to see the lower support fail.  If 
so, it will signal a true daily cycle downtrend commencing.  With 
the FOMC announcement due tomorrow, we have the potential for a 
major direction event.  But on the pure idealized cycles, 
extrapolating from the action of recent weeks, a bounce should be 
expected from or close to today's closing print.


150-tick ES


The short cycle oscillators all finished deep in oversold 
territory, with Keltner support just north of 1140.  A move lower 
will set these oscillators trending and should indicate further 
weakness to target the 1132 level.


Daily YM candles


Nothing to add on YM, which most closely resembles ES.  The 
rising channel support line held into the close.


20 day 30 minute chart of the YM


We saw metals and treasuries advance against US Dollar weakness, 
and equities declined.  With the FOMC meeting on deck, I expect 
volume to be light tomorrow morning.  Volatility took a jump, 
with the VXO up 6.98%, and the question is whether typical pre-
FOMC doldrums or the current higher-anxiety atmosphere will 
prevail.  Support at current levels is strong, but we have a 
break of the channel already completed by the NQ.  While the 
market feels bearish, these moments have been proven to be traps 
for the past several months.  Bottom line: look for a bounce at 
current levels, and if it doesn't come, then I expect potentially 
big selling as the daily cycle downphases on ES, NQ and YM 
reassert themselves over the oversold intraday timeframes.  See 
you tomorrow.


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INDEX TRADER SUMMARY
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Tech bulls get caught with their SOX down

While I've been suffering from flu symptoms the past couple of 
days, the thought of trying to eat a potato chip has my face 
turning green.

Forward earnings guidance from chip-related names like Novellus 
(NASDAQ:NVLS) $34.40 -14.5% and Altera (NASDAQ:ALTR) $22.52
-6.71% helped set a negative tone for today's session, where 
anything chip-related had a bull's face turning red.  The 
Semiconductor Index (SOX.X) 517.42 -4.44% lead broader market 
declines, where the bulk of yesterday's gains for the major 
indices were erased.

In short, technology bulls appeared to have been caught with 
their SOX down, and while the invention of elastic replaced the 
need for socks-suspenders, SOX 500-504 looks to be an important 
near-term level of support.

U.S. Market Watch (01/27/04 Close) - 

 

I've shown my QCharts list of major indices and sectors, where 
today's trade saw a broadly lower trade, with the technology 
portion (MSH.X thru XTC.X) suffering the bulk of today's selling.  
I've displayed today's percentage changes (Net %) as well as 5-
day net percentage change (5DyNet%) and 20-day net percentage 
change (20DyNet%), which gives us a snapshot glance at where 
we've been and where things are at.  

While I've highlighted the Semiconductor Index (SOX.X) as 
tonight's "sector of focus," the Disk Drive Index (DDX.X) 137.19 
-1.69% has been a weak technology sector of late, where building 
competitive pressures in the flash-memory markets has weighed on 
names like SanDisk (NASDAQ:SNDK) $58.14 -3.66%.

Semiconductor Index (SOX.X) - Components (01/27/04)

 

Here's a quick look at the Semiconductor Index (SOX.X) 
components, where NVLS, ALTR and MXIM paced declines.  I've 
placed PINK asterisks by those components that are components of 
the NASDAQ-100 Index (NDX.X) 1,519.23 -2.21%, where any loss of 
semiconductor strength/leadership may be a bad omen for the 
NASDAQ-100, and perhaps broader technology.  I do take note of 
Micron Technology (NYSE:MU) $15.71 +4.73% being a lone gainer in 
today's trade.  Micron makes DRAM chips, which are perhaps the 
most commoditised portion of the semiconductors.

While today is just one day, it makes little sense to this 
analyst, from a fundamental point of view, that the most 
"commoditised" portion of the chip sector would see gains, if the 
grim reaper was ready to harvest some heads in the 
semiconductors.  

Market Snapshot / Internals - 01/27/04 Close

 

The major indices reached their most bullish levels of the 
session at 10:15 AM EST, which was just after the Conference 
Board released its January Consumer Confidence Index reading, 
which jumped to 96.8 from December's 91.3 reading, but was still 
shy of economists' forecast of 99.0.  While the major indices did 
try and firm late in the session, a brief attempt at a rebound 
into the 03:00 hour stopped dead in its tracks as the bond market 
closed.

One observation I made was in the Dow Industrials (INDU) 
10,609.92 -0.9% as it approached its WEEKLY R1 of 10,655.77 after 
what looked to be a successful test of support at 10,613.48, 
where yesterday afternoon's rally really took hold.  

Dow Industrials (INDU) Chart - 5-minute intervals

 

I couldn't have capture the highs of the afternoon any better 
than if I really tried as this screen capture, taken at 02:35 PM 
EST saw the INDU dilly dally just below the WEEKLY R1 (thick red) 
after it kissed our MONTHLY 19.1% retracement of 10,652.33.  The 
"Pow!" was where the INDU broke an intra-day level of resistance, 
that eventually saw the INDU close at new 52-week highs.  With 
the INDU closing at 10,609.92 -0.86%, the bulk of yesterday's 
gains have vanished.  

But lets quickly take a look at the Semiconductor Index (SOX.X), 
where I wanted to show this index with WEEKLY and MONTHLY Pivot 
retracement, which I think can become a test and give us some 
"spatial" observation as to WEEKLY and MONTHLY pivot levels in 
respect to the other major indices.

Semiconductor Index (SOX.X) - Daily Intervals

 

I wanted to quickly look at the SOX.X chart with WEEKLY MONTHLY 
Pivot levels.  Many NASDAQ-100 Tracking Stock (AMEX:QQQ) $37.74 -
2.2% traders like to keep a close eye on the SOX, and see the SOX 
as a leading indicator/sector for the Q's.  At times, the QQQ 
itself will lead a SOX advance/decline and is why index trading 
can be much more complex that individual stock trading as there 
are so many interrelationships taking place.

It becomes rather evident that SOX 540 is a rather important 
level of resistance right now, where 521 and 528 become near-term 
measures for any strength.  You will see some obvious ties with 
the SOX's WEEKLY S1 514 and overlap of its WEEKLY 80.9% 
retracement of 514.24, as with the yellow "zone of support" from 
WEEKLY S2 and MONTHLY Pivot 504.21.  

In the Oscillators (MACD and Stochs) I've tried to envision a 
potential SOX support at 514 as Stochs reach "oversold."  
However, for Stochastics, I'm more skeptical of their reliability 
in a trending market (the regression channel is still bullish).  
MACD currently ties in better with a very bullish index taking a 
rest, where support lies at 500-504.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

 

The similarity I see right now with the SOX.X and the QQQ is 
marked by the yellow "zone of support."  While the grim reaper 
may be coming for the SOX near-term I'd be monitoring the SOX for 
support from 500-504, in correlation with the QQQ at 
approximately $37.36.  

I' not sure we can always associate a 4.14% decline in the SOX 
with a 2.2% decline in the QQQ.  I do think the pivot matrix 
levels do give some levels where we can measure strength/weakness 
from as it relates to the SOX/QQQ relationship.  The simple 
moving averages are of no real help.

I totally agree with QQQ traders that the semiconductors 
strength/weakness play an important role in how the QQQ trades, 
and if a QQQ bull is to look for bullish pullback entry in the 
$37.36-$37.53 area, I would think it best that the SOX be holding 
at or above the 500-504 zone.  

One good "tell" for a bull entry would be if the QQQ were just 
sitting in the $37.36-$37.53 area, while the SOX.X were moving 
higher above 521 or 528 as if a bull's hoof were being applied to 
the gas pedal.  Right now it's not.

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

 

I've pointed to a spot on the SPX's chart dating back to early 
January and 4-days of trade, as what we saw yesterday (SPX 
closing new high) then quickly reversing from the opening bell 
the following day.  

There are some similarities in the SPX chart as the SOX, but not 
as striking as found with the SOX/QQQ.  The one "suspicious" 
trade I noted today was that the BIX.X session high was 355.38, 
which was 0.01 shy of MONTHLY R2.  While the BIX.X has been 
extremely strong, as it might relate to SPX MONTHLY R2 and BIX.X 
MONTHLY R2, then the BIX.X came just shy of "confirming" some of 
the strength seen yesterday in the SPX when it saw trade further 
above its MONTHLY R2.  SPX and OEX traders have appreciated how 
the financials have lent to SPX/OEX strength and while I wouldn't 
consider today's trade in the banks as "weak," their stopping 
just shy of MONTHLY R2 may hint that some of the recent merger-
related news in the sector is being digested.

Pivot Analysis Matrix - 

 

I spent quite a bit of time on the SOX tonight and am running 
late with tonight's wrap.  The "key" levels where I'd have an 
upside and downside alert set would be at OEX Pivot and OEX R1 
for weakness and strength.  I should have "dashed red" the SPX 
MONTHLY R2 and DAILY R1 as this 1,152 level was traded through 
today and would be deemed a tentative level of resistance for 
tomorrow, but a resistance level to be monitoring should the 
major indices attempt a rally into tomorrow afternoon's FOMC 
announcement.

A final note.  I listed all of the SOX components tonight.  I 
didn't do this to just show what a "whacking" some of them took.  
I (Jeff Bailey) don't know if this is the beginning of the end 
for the semiconductors.  I do know this though.

If institutions are still firmly convinced of a longer-term bull 
market intact and some have been sitting on the sidelines the 
past couple of months, some of the SOX components, like a NVLS 
that got creamed, may suddenly be deemed "attractive" as this is 
now a valuation level that makes sense, relative to the longer-
term outlook.  Let's keep an eye on some of these stocks and 
follow their progress.  Those that have been hit hardest might 
firm, while those that may still have some profits to be taken 
out of them move lower in coming sessions.  Still, it is 
difficult to say that NVLS and ALTR's guidance isn't simply based 
on their own products not measuring up to the competitions.

Jeff Bailey


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

No Shortage
- J. Brown

There seems to be a growing number of analysts suggesting that 
investors begin to "trim" their portfolio.  Take some money off 
the table, maybe scale down or get rid of those stocks that are 
under performing.  Oh, it's not that they're bearish.  Most stock 
analysts you hear from are bullish but everyone keeps looking at 
the horizon for the long overdue correction.  Any event is 
suddenly a good excuse to do a little profit taking and this week 
has no shortage of events.  

You could take last night's earnings reports from TXN or NVLS.  
Despite a decent report investors sold the news on TXN and they 
absolutely ran for cover after NVLS warned.  If chip stock 
earnings aren't your style then the Conference Board's consumer 
confidence index could be your event.  Economists were looking 
for a rise to 98.5 in January, up from 91.7 in December.  What we 
got was a rise to 96.8.  This is the highest consumer confidence 
since July 2002 but it's still a disappointment.  Not a big 
enough event?  There's nothing bigger than an FOMC meeting.  The 
current two-day meeting is schedule to end tomorrow and we'll get 
the Fed's decision on interest rates Wednesday afternoon.  No one 
expects any change in rates so the focus is all on their bias 
going forward.  Will they use the "considerable period" language 
or not?

Want more?  Tomorrow we'll get the Durable goods order for 
December.  Economists are expecting a rise of 2% to erase 
November's decline.  We'll also hear the new home sales numbers.  
Estimates are for a small rise to an annualized rate of 1.1 
million homes.  If this report misses expect some bloodshed in 
the homebuilders.  There is definitely a lot of investors to 
digest on top of the parade of earnings.  Speaking of which 
investor reaction has been rather normal.  After a huge eight-
week run higher in the Dow and S&P 500 investors are choosing to 
sell the news.  

Today's action certainly felt bearish.  Advancers lost to 
decliners 12 to 16 on the NYSE and 19 to 12 on the NASDAQ.  Down 
volume washed over up volume on both exchanges (3:1 on the 
NASDQ).  Technical oscillators for a large number of sector 
indices have turned or are rolling over into sell signals.  
Notable losers are the GHA.X, SOX.X, and the IUX.X.  Not because 
they had the biggest losses, well the SOX actually wins that 
honor with a 4.14% drop; but because their MACD's have the 
freshest sell signals.  Also notable was the XAU's gain of 1.92%.  
Gold was the strongest sector today but if you look at the XAU's 
performance it looks like a failed rally at 100.  Be careful 
there!


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

Market Averages

DJIA ($INDU)

52-week High: 10701
52-week Low :  7416
Current     : 10609

Moving Averages:
(Simple)

 10-dma: 10577
 50-dma: 10180
200-dma:  9436



S&P 500 ($SPX)

52-week High: 1155
52-week Low :  788
Current     : 1144

Moving Averages:
(Simple)

 10-dma: 1139
 50-dma: 1091
200-dma: 1014



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1519

Moving Averages:
(Simple)

 10-dma: 1537
 50-dma: 1454
200-dma: 1315



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

Volatility is creeping upward, which is expected after a down day 
in the markets.  Unfortunately, these indices aren't signaling
any major changes.

CBOE Market Volatility Index (VIX) = 15.35 +0.80
CBOE Mkt Volatility old VIX  (VXO) = 15.32 +1.00
Nasdaq Volatility Index (VXN)      = 23.03 +2.04

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.87        762,179       666,311
Equity Only    0.65        653,867       421,537
OEX            1.77         16,387        29,006
QQQ            5.67         18,722       106,156


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

Bullish Percent Data

           Current   Change   Status
NYSE          78.7    + 0     Bull Confirmed
NASDAQ-100    78.0    - 1     Bull Confirmed
Dow Indust.   93.3    + 0     Bull Confirmed
S&P 500       88.4    + 0     Bull Confirmed
S&P 100       88.0    + 0     Bull Confirmed


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

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


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

 5-dma: 0.99
10-dma: 0.95
21-dma: 0.95
55-dma: 1.04


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    1247      1216
Decliners    1618      1908

New Highs     329       275
New Lows        9         2

Up Volume    827M      512M
Down Vol.   1181M     1631M

Total Vol.  2022M     2153M
M = millions


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

Commitments Of Traders Report: 01/13/04

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

Wow!  We've seen a mild reversal in the commercial traders'
positions.  They've moved from mildly net short to mildly net
long.  That's an encouraging sign for more strength in the
markets.  Small traders have grown a bit more cynical with
a slight increase in short positions but they remain net
long.


Commercials   Long      Short      Net     % Of OI
12/22/03      400,066   405,240    (5,174)   (0.6%)
01/06/04      403,721   408,729    (5,008)   (0.6%)
01/13/04      405,558   411,361    (5,803)   (0.7%)
01/23/04      422,135   407,626    14,509     1.7%

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
12/22/03      147,537    81,596    65,941    28.8%
01/06/04      142,844    83,518    59,326    26.2
01/13/04      149,057    90,571    58,486    24.4%
01/23/04      141,107   100,090    41,017    17.0%

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

Commercials are starting to up their bets on the e-minis with
almost 40K new longs and 44K new shorts.  Small traders in
turn reduced their bets but remain net long.


Commercials   Long      Short      Net     % Of OI 
12/22/03      128,801   213,021    (84,220)  (24.6%)
01/06/04      175,489   240,865    (65,376)  (15.7%)
01/13/04      196,858   263,845    (66,987)  (14.5%)
01/23/04      233,867   307,122    (73,255)  (13.5%)

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
12/22/03     125,248     43,482    81,766    48.5%
01/06/04     139,433     51,909    87,524    45.7%
01/13/04     191,241     62,711   128,530    50.6%
01/23/04     187,270     57,196   130,074    53.2%

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


NASDAQ-100

There is very little change in commercial traders' positions
here and the same holds true for the small traders.


Commercials   Long      Short      Net     % of OI 
12/22/03       40,277     36,452     3,825    5.0%
01/06/04       42,892     37,801     5,091    6.3%
01/13/04       41,829     38,547     3,282    4.1%
01/23/04       42,823     39,442     3,381    4.1%

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
12/22/03       22,656    14,544     8,112    21.8%
01/06/04        8,035    17,911   ( 9,876)  (38.1%)
01/13/04        9,705    12,539   ( 2,834)  (12.7%)
01/23/04        9,180    11,371   ( 2,191)  (10.7%)

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

Commercials are also hesitant to make any big changes to their
net bullish stance on the Dow.  Meanwhile small traders grow
a little more bearish.


Commercials   Long      Short      Net     % of OI
12/22/03       14,088     9,998    4,090      17.0%
01/06/04       15,697     9,497    6,200      24.6%
01/13/04       16,501     8,724    7,777      30.8%
01/23/04       16,403     9,252    7,151      27.9%

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
12/22/03        6,915     8,983  ( 2,068)   (13.0%)
01/06/04        5,713     8,105  ( 2,392)   (17.3%)
01/13/04        6,496     9,970  ( 3,474)   (21.1%)
01/23/04        6,068    10,183  ( 4,115)   (25.3%)

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 01-27-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AMZN, MXIM, STJ
Dropped Puts: None
Call Play Updates: APOL, CSC, ESRX, GENZ, HSIC, MBI, MWD
New Calls Plays: None
Put Play Updates: ADBE, QLGC
New Put Plays: KSS, NSM


****************
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:
*****

Amazon.com - AMZN - close: 55.74 chg: -1.29 stop: 55.00     

According to our strategy we've been discussing the last several 
days, we would have closed this play Tuesday afternoon to avoid 
any earnings surprises or disappointments.  It was a good thing 
too because AMZN is down in after hours to $53.88 despite guiding 
higher for the next quarter.  AMZN reported GAAP earnings of 29 
cents a share, which were in-line with expectations.  Revenues 
soared more than 36% to $1.95 billion for the quarter, well above 
estimates of $1.86 billion.  Management raised guidance for the 
first quarter saying revenues should fall between $1.39-1.49 
billion, above estimates of $1.32 billion.  AMZN also raised its 
full year projections.  

Picked on January 14 at $55.01
Change since picked:    + 0.74
Earnings Date         01/27/04 (confirmed)
Average Daily Volume:       10 million 
Chart =



---

Maxim Integrated - MXIM - cls: 52.03 chg: -3.05 stop: 52.49      

Ouch!  Investor reaction to TXN and NVLS's earnings reports that 
came out last night was not positive.  The semiconductor index 
(SOX) lost 4.14% and investors decided to take some money off the 
table in MXIM.  Shares of MXIM fell 5.5% and broke through 
support at $52.60, passed our stop at $52.49 and stalled at $52.  
Closing at its low for the day is not a good sign for tomorrow 
and we'd expect MXIM to aim for the $50 level.  While we may be 
out of the play keep an eye on it.  The $50 region is near the 
bottom of its rising channel and it may offer another trading 
opportunity soon.

Picked on January 06 at $51.89
Change since picked:    + 0.14
Earnings Date         02/05/04 (confirmed)
Average Daily Volume:      5.4 million 
Chart =


---

Saint Jude Medical - STJ - cls: 65.39 chg: +0.00 stop: 62.75     

The good news for STJ shareholders is that support at $65 and its 
rising 10-dma held.  The bad news is that our strategy was to 
close the play this afternoon to avoid any disappointing 
surprises in its early morning earnings report due out tomorrow.  
This closes the play for us with a small move but we won't have 
any sleepless nights about whether or not STJ beats the estimates 
or guides higher for the current quarter.  It may not be bad news 
after all.

Picked on January 12 at $64.01
Change since picked:    + 1.38
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      1.4 million 
Chart =



PUTS:
*****

None


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success.

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********************
PLAY UPDATES - CALLS
********************

Apollo Group - APOL - close: 72.57 change: -0.87 stop: 71.00

The past few sessions have been rough on APOL bulls, as the stock 
pulled back from its highs near $75 to consolidate just above 
what should now be strong support near $72.  With yesterday's 
strong market rally, price got a nice rebound and things were 
looking rosy for those that bought last week's dip near support.  
But Tuesday's broad market decline pushed APOL right back to its 
$72.50 price magnet and the situation is a bit dicey here.  This 
could be the setup for another entry point if APOL can rebound 
from above the 20-dma (currently $71.85).  Note that the daily 
Stochastics oscillator (5,3,3) is attempting to turn back up from 
near oversold territory.  But if the bears rule again tomorrow 
and the 20-dma fails as support, odds are good that the nascent 
Stochastics reversal will be erased and our $71 stop will be 
violated.  So aggressive entries can be taken on a rebound from 
support, but the more conservative approach will be to wait for a 
rally back through $74 before adding new positions.

Picked on January 13th at    $72.63
Change since picked:          -0.06
Earnings Date               3/18/04 (unconfirmed)
Average Daily Volume =     1.83 mln


---

Computer Sciences Corp - CSC - cls: 45.68 chng: -1.00 stop: 43.50

It was really disappointing to see our CSC play unable to 
capitalize on yesterday's broad market rally, posting only the 
tiniest of gains the day after a major breakout over $46 
resistance.  That disappointment grew on Tuesday, with the sharp 
pullback, which erased all of last Friday's gains, leaving in 
place a bearish looking 3-day candle pattern.  We were hoping for 
a bit of a pullback to provide a better entry near $45 and it 
certainly looks like we're going to get it.  The big question is 
whether it will truly be an entry point or whether it should be 
left alone.  We'll have to let price action be our guide, but 
entries should only be taken on a rebound from potential support 
near $45, not just on that price level being touched.  Note that 
both the 10-dma ($45.23) and 20-dma ($44.99) are converged near 
that level and should act to reinforce support.  If looking to 
enter on strength, traders will now need to wait for a rally back 
over Friday's intraday high at $46.82.  Maintain stops at $43.50, 
which is just below the consolidation lows of the past month.

Picked on January 25th at    $46.54
Change since picked:          -0.86
Earnings Date               2/11/04 (confirmed)
Average Daily Volume =     1.22 mln


---

Express Scripts - ESRX - cls: 69.86 chng: +0.21 stop: 64.75*new*

As though impervious to the gyrations of the broad market, our 
ESRX play just keeps grinding a bit higher each day.  The 
strength in the overall market yesterday lent a strong bid to the 
stock, as it rebounded smartly off the 10-dma ($67.91) and it 
built on those gains today, ending just below $70 after trading 
slightly above that level early in the day.  Over the past week, 
the stock has built solid intraday support near $67.75 and a dip 
back near the 10-dma may prove to be a viable entry.  The 
persistent rise since last week's breakout suggests that a 
pullback to test the $66 support level may not be in the cards at 
this time.  If such a pullback did materialize though, it should 
see active dip buying, especially with that support level now 
reinforced by the 30-dma ($65.75).  Aggressive traders can enter 
on strength above today's high, but our preference remains to buy 
the dips near the 10-dma.  Note that we're raising our stop to 
$64.75, just under the 50-dma ($64.77).

Picked on January 13th at    $68.32
Change since picked:          +1.54
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =     1.23 mln


---

Genzyme Corp. - GENZ - close: 55.67 change: +0.05 stop: 51.00

Volatility anyone? GENZ has provided plenty of it over the past 
week as the bears continue to sell into each and every rally 
attempt over $56, while the bulls aggressively buy the dips below 
$55.  This stalemate will eventually be resolved and we think to 
the upside.  The wet blanket that seems to be holding the stock 
back is the Biotechnology index (BTK.X), which suffered a 2% loss 
on Tuesday after failing to break out over the $527.50 resistance 
level yesterday.  If the bulls aren't able to successfully defend 
$515 support, then a dip back to the $500 area seems likely.  
Such a pullback would likely have GENZ dipping back towards the 
10-dma ($53.69) and quite possibly stronger support in the $52-53 
area.  A rebound near there would finally give the dip buyers the 
entry point they've been waiting for since the stock broke above 
$52 nearly 2 weeks ago.  With the selling pressure that has been 
coming in at the bottom of the $57-58 resistance zone, we're 
still not in favor of breakout entries.  Maintain stops at $51 
for now.

Picked on January 20th at    $53.00
Change since picked:          +2.67
Earnings Date               2/19/04 (unconfirmed)
Average Daily Volume =     2.82 mln


---

Henry Schein - HSIC - close: 70.96 chg: -1.07 stop: 67.50*new*

Yesterday's strong rally in the markets inspired a nice move in 
HSIC to above the $72 mark.  Unfortunately, HSIC followed the 
herd again today with a pull back to $71.  It looks like traders 
might get another opportunity to buy a dip towards the $70 level.  
Fortunately, $70 should be decent support bolstered by its simple 
10-dma.  We're going to raise our stop to $67.50, which is about 
25 cents below the simple 50-dma.  In the news HSIC announced 
that its CFO would be presenting at the UBS Global Healthcare 
Services conference on Tuesday, February 3rd.

Picked on January 22 at $70.65
Change since picked:    + 0.31
Earnings Date         03/04/04 (unconfirmed)
Average Daily Volume:      334 thousand
Chart =


---

MBIA Inc. - MBI - close: 62.58 chg: -0.65 stop: 59.99     

How about that?  After two days of trading MBI closed right back 
at Friday's level.  We keep expecting a pull back to the $61 
region and it has not yet materialized.  However, odds are 
growing that it will.  The IUX insurance index has finally closed 
under its simple 10-dma (just as MBI did).  The IUX has also 
produced a bearish sell signal from overbought on its MACD 
indicator.  Together, these two observations make us cautious on 
new bullish positions for MBI.  A bounce from $61 still looks 
buyable for MBI but any profit taking may not stop if the IUX 
begins a much larger consolidation.  Be careful.  After 9 weeks 
of gains the IUX is overdue for a dip.  The question now is how 
deep will it be.  With this sort of bias we would not be rushing 
to commit new capital to bullish plays in MBI.  

Picked on January 20 at $62.93
Change since picked:    - 0.35
Earnings Date         02/03/04 (confirmed)
Average Daily Volume:      572 thousand
Chart =


---

Morgan Stanley - MWD - close: 58.72 chg: -1.61 stop: 56.75

The profit taking that washed across the markets today didn't 
stop at the XBD broker-dealer index, which fell 1.48%.  The bad 
news is that MWD under performed with a 2.66% decline of its own.  
We're not excited about the close under $59.00 but mentioned a 
possible dip to the 50-dma, now approaching $57.00, as the next 
support level and potential entry point.  If you prefer to see 
the glass as half full then MWD might be building a bullish flag 
consolidation pattern.  We would be cautious about initiating new 
positions here, especially if patient traders get an opportunity 
to buy a bounce from $57.00.  In the news both MWD and JPM have 
decided to sell Samurai bonds.  These are yen-based bonds sold in 
Japan by non-Japanese entities.  These typically have a five-year 
maturation date.

Picked on January 15 at $59.81
Change since picked:    - 1.09
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million 
Chart =



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

None


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*******************
PLAY UPDATES - PUTS
*******************

Adobe Systems - ADBE - close: 37.59 change: -0.75 stop: 39.50*new*

Continuing to volley back and forth, the bulls and bears are 
still keeping shares of ADBE pinned in a rather tight range.  
Resistance has been firm at the 20-dma ($38.44) and it once again 
served its function this morning, turning the stock back from its 
early morning foray above $38.50.  By the end of the day, ADBE 
had shed nearly 2% and came to rest right back on the magnetic 
200-dma ($37.60).  Price action does seem to be weakening and it 
seems only a matter of time before the 200-dma will give way once 
and for all, leading to a break of the $36 support level and then 
a drop to next support in the $33-34 area.  But so far, that 
break has been exceedingly elusive.  The aggressive entry 
strategy continues to be opening new positions on rejections from 
below the 20-dma, while traders looking to enter on weakness are 
still waiting for the break of $36.  With the last reaction high 
at $39.29 and the 50-dma now at $39.41, it seems safe to inch our 
stop down to $39.50.

Picked on January 11th at     $37.12
Change since picked:           +0.47
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.43 mln


---

QLogic Corp. - QLGC - close: 45.54 change: -1.20 stop: 48.50

When we initiated coverage of QLGC last week, we had a strong 
suspicion that the stock would rebound from the $45 level before 
breaking it.  Sure enough, that's what happened, with our desired 
entry point near $47 resistance occurring near the end of the day 
yesterday.  Proof of the rightness of that strategy came today 
when the stock moved lower right from the opening bell and closed 
at the low of the day, pressured throughout the session by the 
weakness in the Semiconductor index (SOX.X), which lost more than 
4%.  Traders looking to enter on weakness are likely to get their 
chance tomorrow on any follow-through weakness that pressures 
QLGC below the $45 level.  It may happen early or it may wait 
until after the FOMC nonevent -- it's hard to tell.  But when the 
break does occur, it will open the door to a drop near next solid 
support in the $41-42 area.  Until QLGC breaks and closes below 
$45, we'll maintain our stop at $48.50.

Picked on January 22nd at    $45.25
Change since picked:          +0.29
Earnings Date               4/14/04 (unconfirmed)
Average Daily Volume =     3.85 mln



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

Kohls Corp - KSS - close: 44.05 change: -0.11 stop: 45.05

Company Description:
Based in Menomonee Falls, Wisconsin, Kohl's is a family-focused, 
value-oriented specialty department store offering moderately 
priced national brand apparel, shoes, accessories and home 
products. The company operates 542 stores in 36 states.
(source: company press release)

Why We Like It:
We're picking KSS for the put list due to its technical weakness 
and descending channel.  Bears could also argue that KSS's 
disappointing earnings performance last year and its -1.2% 
comparable-store sales growth is pretty dismal, especially for 
holiday shopping-powered December.  The company also lowered its 
Q4 (current quarter) guidance from 89-95 cents to 68-70 cents.  
Bulls will argue that KSS is still a growth play and its $275 
sales per square foot is well above its peers.  We're going to 
play the trend and currently the larger trend is down.

We'd suggest plays at current levels with a stop at $45.05.  The 
$45 level should be price resistance and the 40 & 50-dma's will 
also act as technical resistance.  More conservative traders 
might want to consider plays once KSS trades under its 10-dma 
currently at $43.35.  Our first target is $40 but the bottom of 
the channel suggest a possible target in the $37-38 range.

Suggested Options:
KSS earnings are in late February and we don't plan to hold over
the event.  That being said our favorite strikes would be the 
February puts but March and Aprils are available.

BUY PUT FEB 45*KSS-NI OI= 7363 at $2.10 SL=1.00
BUY PUT FEB 40 KSS-NH OI=12065 at $0.35 SL= --
BUY PUT MAR 45 KSS-OI OI=  173 at $2.90 SL=1.50
BUY PUT MAR 40 KSS-OH OI=  110 at $0.95 SL= --

Annotated Chart:

 

Picked on January 27 at $44.05
Change since picked:    - 0.00
Earnings Date         02/26/04 (unconfirmed)
Average Daily Volume:      4.6 million 
Chart =


---

National Semiconductor - NSM - cls: 36.73 chng: -1.57 stop: 39.00

Company Description:
National Semiconductor Corporation designs, develops, 
manufactures and markets an array of semiconductor products, 
including a line of analog, mixed-signal and other integrated 
circuits (ICs).  These products address a variety of markets and 
applications, including amplifiers, personal computers, power 
management, local and wide area networks (LANs and WANs), flat 
panel and cathode ray tube displays and imaging and wireless 
communications.  The Company's operations are organized in five 
groups: the Analog Group, the Displays Group, the Information 
Appliance and Wireless Group, the Wired Communications Group and 
the Custom Solutions Group.

Why we like it:
After months of leading the NASDAQ higher through its 
demonstration of relative strength, the Semiconductor sector 
(SOX.X) is finally starting to look truly top-heavy.  Less then 
exciting news from NVLS in its earnings report last night got the 
ball rolling and the SOX shed more than 4% on Tuesday to close 
just above its 50-dma ($515) and just above the bottom of the 11-
month rising channel at $510.  We've had our eye on shares of NSM 
since early December, when the stock first broke below $40 and 
the 50-dma.  The bulls managed to buy the dip and drive the stock 
back up tot the $43 area earlier this month, but since then NSM 
has been steadily falling.  Breaking back under the 50-dma (now 
at $40.48) was a nice start, but the real clincher was the break 
under the 100-dma ($38.79) for the first time since last April.  
After a couple days of consolidation below that average, NSM took 
another sharp turn lower today, losing more than 4% and closing 
below $37 for the first time since late October.  

It looks like a sure deal for the $36 support level to be tested 
later this week and if that support breaks, we'll be eyeing a 
near-term drop near $32, the site of strong support at the top of 
the early September gap.  But if the profit taking gets carried 
away, a drop to test the 200-dma ($30.52) isn't out of the 
question.  Note that a trade at $35 will generate another PnF 
Sell signal, issuing a tentative bearish price target of $26.  
The bullish support line is still down at $23, meaning that if 
the bears do get hungry, they've got a lot of territory to cover.  
Our strategy will be to use a trigger at $35.85 (just under the 
12/16/03) intraday low and initially target the $32 level.  If 
the 200-dma is reached, we'll definitely want to take an exit 
there.  We'll need to monitor the SOX for signs of continued 
weakness as well, and if it breaks $500, NSM seems sure to reach 
at least our initial target.  Set a fairly tight stop at $39, 
which is just over the past three day's intraday resistance as 
well as the 100-dma.

Suggested Options:
Aggressive short-term traders can use the February 35 Put, while 
those with a more conservative approach will want to use the 
February 40 put.  Our preferred option is the March 35 strike, as 
it provides more time until expiration.  

BUY PUT FEB-40 NSM-NH OI=4099 at $3.80 SL=2.25
BUY PUT FEB-35 NSM-NG OI=5025 at $1.05 SL=0.50
BUY PUT MAR-35*NSM-OG OI= 663 at $1.90 SL=1.00

Annotated Chart of NSM:

 

Picked on January 27th at     $36.73
Change since picked:           +0.00
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      3.39 mln



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The Option Investor Newsletter                  Tuesday 01-27-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Watch List: A couple up, a couple down


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

A couple up, a couple down

___________________________________________________________________

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.
___________________________________________________________________


Davita Inc - DVA - close: 40.12 change: +0.95

WHAT TO WATCH:  There was no profit taking in DVA today.  The 
stock actually broke out above the $40 level of resistance with 
no apparent catalyst for the move.  There is still potential 
resistance near $40.41 from its December 3rd high but from the 
looks of DVA's intraday chart we could see some follow through 
tomorrow.

Chart=


---

Magna Intl Corp - MGA - close: 83.11 change: +0.64

WHAT TO WATCH:  Out performing the markets today is auto-related 
MGA.  The stock appears to be breaking out over the $82.50 level 
from a long-term wedge-pattern.  We would look for a move over 
$84 to confirm the bullish breakout.  Fortunately, volume has 
been strong the last couple of sessions.


Chart=


---

Interactive Corp - IACI - close: 32.99 change: -0.97

WHAT TO WATCH:  Shares of IACI appear to be failing again at the 
top of its descending channel that began back in July.  IACI does 
have some support at the $32 level and bearish traders might 
consider a trigger there.  The bottom of the channel suggests 
traders could aim for a move to the $27-28 range.  

Chart=


---

Wyeth - WYE - close: 41.05 change: -0.55

WHAT TO WATCH:  After gapping down four days ago, shares of WYE 
have continued to sink.  The stock closed under its simple 50-dma 
today but remains above what might be support at $41 and $40.  
Bears can keep this on their list for a possible move to the $37-
38 range.  

Chart=



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

IBM $98.80 -1.05 - As expected the $100 level is acting as new 
resistance for IBM.  Today's candle looks like a bearish harami 
pattern.  Nimble bears might consider scalping a move from $98 to 
$95 with a trigger under $98.

AIG $68.45 -1.18 - AIG is looking more and more vulnerable to 
potential profit taking.  The IUX has closed under its 10-dma and 
AIG is approaching its 21-dma.  Traders could use a trigger at 
$68 for a quick move to $65.

ITT $75.50 +1.14 - If you're looking for a relative strength 
play, ITT is flexing its muscles.  Shares broke through 
resistance at $75 while the rest of the market was falling.


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