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Daily Newsletter, Wednesday, 01/28/2004

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The Option Investor Newsletter                Wednesday 01-28-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Stocks Plunge on Fed Announcement
Futures Wrap: The Dollar Reflates
Index Trader Wrap: Has the Fed turned the clock back?


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     01-28-2004            High     Low     Volume Advance/Decline
DJIA    10468.37 -141.55 10658.43 10437.78 2.29 bln    740/2166
NASDAQ   2077.37 - 38.67  2128.00  2073.15 2.30 bln    840/2263
S&P 100   559.49 -  7.66   569.55   558.27   Totals   1580/4429
S&P 500  1128.48 - 15.57  1149.14  1126.50
RUS 2000  583.91 - 11.26   598.46   582.84
DJ TRANS 2967.68 - 73.54  3044.87  2964.88
VIX        16.78 +  1.43    40.13    15.29
VXO        17.10 +  1.78    17.11    15.24
VXN        25.16 +  2.13    25.21    22.83
Total Volume 5,145M
Total UpVol  1,040M
Total DnVol  3,963M
52wk Highs     636
52wk Lows       12
TRIN          1.39
PUT/CALL      0.85
*******************************************************************

Stocks Plunge on Fed Announcement
by James Brown

With just a few choice words the FOMC was able to do what the
bears have been unable to accomplish - put the bulls on the run.
Stocks traded mostly higher earlier in the session, despite some
disappointing economic news until the Fed's decision on interest
rates sparked a very widespread sell-off.  The Dow's 141-point
(1.33%) drop was the worst one-day decline in three months for
the index.  The NASDAQ plunged 1.82% and the S&P 500 fell 1.36%.

Generally positive earnings news helped lift stocks early on but
by the end of the session only one sector remained in the green.
That was the utilities index, which added 1.16%.  Odds are
investors fled to these higher-dividend yield issues as a safe
haven.  The heaviest selling showed up in homebuilders and
airlines but natural gas stocks, broker-dealers, networking,
hardware, retail and gold issues all fell sharply.

Overseas markets were mixed.  European stocks were mostly higher
while Asian exchanges posted losses.  The Chinese Hang Seng index
dropped 330 points or 2.4% to close at 13,431.  There didn't
appear to be any news on the decline but I suspect it was a
reaction to the resurgence of Avian flu, a deadly strain that
Thailand recently admitted to hiding its own recent outbreak.
Investors fear that the outbreak, now in six Asian countries,
will affect air travel to the region and the XAL airline index
dropped 5.25%.  Compounding the XAL's losses were negative
comments from Goldman Sachs who downgraded JetBlue Airways (JBLU)
to an "under perform".  JBLU is expected to announce earnings
tomorrow morning before the bell.  Estimates are for 17 cents a
share.

Market internals for the U.S. stock markets were probably the
most bearish we've seen in quite some time.  Declining stocks
outnumbered advancers 3-to-1 on the NYSE and 11-to-4 on the
NASDAQ.  Down volume was more than three times up volume on both
exchanges.  The volatility indices spiked higher with the VXO
(old VIX) gaining 11.6% to 17.1 and the new VIX jumping 9.3% to
16.78.  These are still low readings but they are setting the
stage for a bearish move in the markets.

Prior to the Fed's afternoon decision on interest rates investors
were greeted with a disappointing durable goods order report.
Estimates had been for a 2% rise in December to offset a 2.3%
drop in November.  Unfortunately durable goods orders were
unchanged last month.  Wall Street also had to digest a drop in
new home sales.  The Commerce Department reported this morning
that December's new home sales slipped 5% to a seasonally
adjusted rate of 1.06 million units.  This is still a very
healthy rate and pushed the number of new homes sold in 2003 to
1.085 million, a new record.  Yet it was a disappointment and
sent the homebuilders to early losses.

Now we get to the real reason the markets sold off.  The Federal
Reserve's two-day meeting ended today and the Fed governors voted
unanimously to keep the fed funds rate at 1 percent, the lowest
level since 1958.  No one actually expected a change in rates and
the focus was on the Fed's bias.  Would they keep the
"considerable period" language or not?  The answer was no.  Jim
called it in last night's wrap.  With upside and downside risks
"roughly equal" and the markets soaring to new 2 1/2 year highs
the FOMC opted to change their bias to "can be patient" with its
accommodative stance.   The full text of the Fed's statement
follows:

  The Federal Open Market Committee decided today to keep its
  target for the federal funds rate at 1 percent.

  The Committee continues to believe that an accommodative stance
  of monetary policy, coupled with robust underlying growth in
  productivity, is providing important ongoing support to economic
  activity. The evidence accumulated over the intermeeting period
  confirms that output is expanding briskly. Although new hiring
  remains subdued, other indicators suggest an improvement in the
  labor market. Increases in core consumer prices are muted and
  expected to remain low.

  The Committee perceives that the upside and downside risks to the
  attainment of sustainable growth for the next few quarters are
  roughly equal. The probability of an unwelcome fall in inflation
  has diminished in recent months and now appears almost equal to
  that of a rise in inflation. With inflation quite low and resource
  use slack, the Committee believes that it can be patient in
  removing its policy accommodation.

No one knows what sort of time frame "patient" equates to but the
market assumes it's shorter than the previous "considerable
period".  The reaction was immediate.  Bond prices plummeted.
The yield on the 10-year note shot from 4.08 percent to 4.199
percent.  The U.S. dollar rose against the yen and the euro and
gold jumped $4.50 to close at $414.60 an ounce.  Investors
immediately hit the sell button and stocks plunged.  The previous
losses in the homebuilders grew worse by the close.  The move in
bonds will push mortgage rates higher, which in turn will slow
home sales during an already seasonally slow period (no one likes
to go house hunting in the snow).

Analysts reaction to the new language was all over the board.
Some felt it was a monumental change; others described it as a
baby step toward inching rates higher.  Odds that the Fed might
hike interest rates in June or August this year spiked higher but
there are still plenty of pundits who feel the Fed won't move
until next year.  Any time Greenspan speaks the markets analyze
every word for some sign of change in the Fed's monetary policy.
We'll get to here from him again next month with his February
11th appearance before the House Financial Services Committee, on
February 12th in front of the Senate Banking Committee and again
on February 25th before the House Budget Committee.

The Fed decision was obviously the big story today but there were
plenty of stock-specific stories making headlines as well.  Tenet
Healthcare (THC) was one of them.  Shares of THC dropped 18% to
$13.18 after warning that its Q4 and full year numbers would be
below estimates.  THC also announced it would be selling 27 of
its 96 hospitals in a massive restructuring program.  Volume was
extremely high at 37 million shares compared to the average 3.5
million.  The company was already suffering investor flight due
to a government probe into its billing practices.

Dow components making the news were PG, DD and MO.  Procter and
Gamble (PG) reported its December quarter earnings, which were
slightly ahead of estimates but issued less than inspiring
comments for the current quarter.  DuPont (DD) reported earnings
last night and beat estimates by 4 cents on revenues that
surpassed expectations.  The company guided slightly higher for
the current quarter and ended the day as the Dow's best
performer.  Altria Group (MO) also bucked the downtrend today
coming in right behind DD as the second best performer in the Dow
after reporting earnings that were in-line.  MO's revenues did
beat consensus estimates and shares added 1.18% but I suspect the
gain was investors fleeing to high-dividend yielding stocks as a
safe haven.

One of today's biggest topics was the MyDoom virus.  The MyDoom
virus, also known as Novarg or Shimgapi has suddenly ballooned
into the worst virus (or worm) attack to date surpassing the
SoBig virus last year.  Some reports suggest that 1 in 9 emails
over the last couple of days were infected with the virus and the
clean up costs could top $250 million as corporations scramble to
unclog and protect their networks.  The MyDoom story is
interesting because infected computers are left with a trojan,
which is set to direct Denial of Service attacks against the SCO
Corp.  You may remember SCO for its ongoing litigation against
IBM and any one else selling servers with the Linux software.
SCO claims that Linux uses copyrighted code from the UNIX
operating system of which SCO holds significant rights to.
Widespread virus attacks like these tend to draw attention to
Symantec (SYMC) and Network Associates (NETA), both of which
recently hit new relative highs.

Chart of the DJIA:



Chart of the NASDAQ:



Looking over the action in the major indices one has to wonder if
this is the beginning of the long overdue correction everyone has
been waiting for.  The change in the Fed's language is a great
"excuse" to start taking more money off the table, which wouldn't
be a bad thing.  A 5% pull back from the Dow's recent highs would
not even bring it back to the 10,000 mark.  A similar drop in the
NASDAQ would still leave it above the 2000 level.  Technical
traders will point to the Dow's close under the 10,500 level and
its close under the 21-dma, where the index bounced on Jan. 13th,
as a short-term bearish development.  The NASDAQ looks even worse
with its close under 2100.  The reality is any sort of
significant pull back will be healthy for us.  There is still
plenty of money sitting on the sidelines just waiting for the
right "dip" and a pull back to 10K or 2K might be just what these
investors are looking for.

Tomorrow will bring even more earnings announcements but we'll
also hear the latest weekly jobless claims numbers.  Economists
are expecting 341,000 claims, which is almost unchanged from last
week.  We'll also get the Employment Cost Index tomorrow and
Friday brings the University of Michigan Sentiment index for
January, the Chicago Purchasing Manager's Index and the all
important fourth-quarter GDP number.  If the economic data
remains positive investors should continue to be there waiting
for the next dip.


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

The Dollar Reflates
Jonathan Levinson

The Fed surprised us with a net 5.5B addition via its morning
open market operations, departing from its usual "No action" call
for the day of an FOMC announcement.  The absence of wildly
inflationary promises for a change resulted in immediate selloffs
in equities, treasuries, metals, the CRB and foreign currencies
as the USD rose.

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


I've zoomed in on the 10 minute chart to show the intraday action
in the US Dollar Index today.  The rising dollar coincided with
pullbacks in all other primary asset classes valued in US
Dollars. The CRB declined 3.04 to close at 263.95, led lower by
cotton, cocoa, soybean and coffee futures.


Daily chart of February gold


Gold opened higher and drifted to new highs at 415 ahead of the
announcement, only to reverse after 2:15 when which the very
notion of inflation risk was entertained by the Fed.  With Globex
feeds intermittently failing throughout the remainder of the
session, gold and silver futures returned to negative territory,
but falling far less dramatically than equities, bonds and the
gold mining indices.  Please note that Prophetcharts delivered
the correct candle for today, but in the wrong color- it should
be red instead of the green in which it appears on the daily
chart.

The morning strength and lack of serious decline brought us
closer to a buy signal at the bottom of the daily cycle
downphase, the bounce coinciding with lower rising trendline
support in the 404-5 area. For the day, February gold dropped .30
to close at 409.70, March silver -.045 to close at 6.50, XAU
dropped 2.72% to close at 96.28 and HUI lost 2.89% to close at
219.39.

Daily chart of the ten year note yield


It was not the day to have tight stops on short plays in
treasuries as bonds painted a better than 20 bp range for the
day.  Ten year note yields gained 1.62% or 11.2 basis points to
close at 4.199%, closing above immediate resistance as the daily
cycle upphase in the yield reasserted itself.  This occurred
despite a respectable 9B overnight repo replacing 3.5B expiring.
4.3% is the next resistance on the way to the descending
trendline at 4.34%.  Provided that Bernanke and Fukui-san don't
swing into action during the coming hours, I see no reason for
those levels not to be tested.


Daily NQ candles


The NQ dropped 26.50 points to close at 1493.50, a 1.74% drop.  A
second black, or in this case, red crow followed yesterday's
bearish engulfing as sellers finally did some actual damage on
the NQ.  The 1515-20 confluence zone was broken with authority as
the NQ overshot 1492 support, reaching a session low of 1489.
The daily cycle downphase extended, with 1500 broken on a closing
basis.  The 22 day EMA turned down for the first time since early
December.  Bollinger support lines up with the 61.8% Fibonacci
support line at 1460, just north of rising trendline support in
the 1430 area.


30 minute 20 day chart of the NQ


The NQ put in a lower high on the 30 minute cycle oscillator, the
first sign of trouble ahead of the FOMC announcement.  We had
been looking for some kind of surprise that would provoke the Fed
to add a 9B overnight repo on the day of its announcement, and
the lower NQ cycle high on this key timeframe was the second clue
of brewing trouble.  The break below 1515 was major, setting up a
head and shoulders-esque breakdown targeting the mid-1460's
assuming a 1515 neckline.  A bounce from here would have stiff
resistance at 1515-20, but could print a bullish oscillator
divergence if it actually occurs, due to the price getting so far
ahead of the oscillator on the decline.  That said, the cycle
still points straight down on both the daily and 30 minute
timeframes, setting up an optimal environment for bears.  1482 is
the next support, followed by 1460.


Daily ES candles


ES lost 13.25 points or 1.16% to close at 1129.25 but reaching as
low as 1124.75.  Next major support is between 1115-18, a key
support but whose equivalent on the NQ broke today.  The daily
cycle oscillators printed actual sell signals, the first since
mid December, and the rising trendline broke for the first time
since November.  Resistance is now at former support at 1130.


20 day 30 minute chart of the ES


Again, we see the same damage as on the NQ chart, but the head
and shoulders-type interpretation is not as evident.  1115 seems
a long way down, and has been firm support and was prior
resistance.  I expect a move to that level to bottom the 30
minute cycle oscillators and would expect at least a pause, if
not a bounce.   The wildcard is the impact of the new daily cycle
downphase, which is a factor that had been absent for the past
month and a half.  A weak bounce from 1115, failing at or before
1130, would be as significant a victory for bears as the failure
to breach 1149 was today.

150-tick ES


I've left the volume-by-price lines on to demonstrate the
beautiful liquidation that took place at 1146, where a huge
number of shares were unloaded prior to the drop.  The short
cycle oscillators are looking for an upphase here, but the bigger
issue will be the synchronous daily and 30 minute cycle
downphases commenced today.


Daily YM candles


YM dropped 1.154 or 123 points, closing at 10467.  Nothing else
to add, as YM resembles ES here.  Support at the rising trendline
is next at 10360.


20 day 30 minute chart of the YM


The Fed's announcement was bullish as potentially bullish for the
dollar as it was bearish for bonds, and the market didn't wait to
check for certain.  The binary trade of dollar vs. everything
reversed today as the pattern that gave us the 2003 rally ran in
reverse, with stronger dollar, weaker everything else.  How far
this trend carries remains to be seen, but given the extension on
most of our charts, the current correction has potential to run
very far indeed.  That's excessive, however, because there's
plenty of support for equities, commodities, bonds and other
assets built up, just as there is resistance for the dollar.  And
so, as ever, trade what you see.


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

Has the Fed turned the clock back?

Today marks one of the first days since January 2001, when the
Fed's tone toward interest rates showed modest shift.  The
thought of the fed funds rate staying at 45-year lows was tweaked
from fed funds staying at 1% as on December 9, 2003 the Fed said
"...the Committee believes that policy accommodation can be
maintained for a considerable period" to today's "...the
Committee believes that it can be patient in removing its
policy accommodation."

In essence, the Fed has seen something in the last month-and-a-
half, which has it believing the economy may now be growing at a
pace of longer-term sustainability, to begin preparing market
participants for higher interest rates.

In what may be viewed as Mr. Greenspan and fellow Fed members
turning back the hands of time, today might well be similar to
that of May 1998.  Just prior to the second leg of a powerful
bull market.

Tonight I want to quickly revisit this topic, which we discussed
back on August 31, 2003 in our Ask the Analyst column titled
"Gold and the Fed.  Too loose, too tight, or just right?"

Here's the chart of the S&P 500 Index (SPX.X) 1,128.48 -1.36%
from that Ask the Analyst column.  At that time (08/31/2003) the
SPX was trading 1,008.01.  Gold was trading at $375.70 and closed
its regular session at $414.60.  As I type, spot gold has just
opened for tomorrow's trade at $409.40.

S&P 500 (SPX.X) - Monthly Intervals (08/31/03 Ask Analyst)



I wanted to quickly revisit the August 31, 2003 Ask the Analyst
column, with special attention to the May 1998 Fed meeting, when
the Fed hinted of tightening.  You and I have questions about the
future.  What impact will today's Fed comments have on market in
the future?  While history is no guarantee of the future, it may
help serve as a guide.

In May of 1998, the Fed hinted at tightening, but actually ended
up cutting rates 1/4 point, before it started a pattern of rate
hikes.

While I (Jeff Bailey) don't think the Fed will be cutting rates,
anytime soon, there is still the uncertainty that the economy is
currently generating job growth.

From a longer-term perspective, today's hint from the Fed that is
is now leaning more toward a rate hike (probably 25-basis points
at most) a trader and investor might begin thinking the SPX is at
a similar level today as it was in May 1998, when the Fed began
hinting of a rate hike.

Certainly times are different.  There are different dynamics in
play, but today's trade was all about a response to the Fed.

Let's quickly take a look at the above chart, but "cleaned up"
(not all those notes) and get a clearer perspective.

S&P 500 Index (SPX.X) Chart - Monthly Intervals (01/28/04)



The above chart is to simply give us a perspective of what type
of "cycle" we might expect in the coming MONTHS and allow traders
and investors to begin thinking accordingly, where tests can be
applied going forward.

I will say this.  While there is disagreement from gold bulls
that there are different dynamics in play today than there was in
1998, and that we can't use "gold $400" as a level for the Fed to
be basing interest rate decisions on, I (Jeff Bailey) and perhaps
you can perhaps use gold's current price level above $400 to at
least make some sense of today's slight change in wording found
in it brief statement.

For those interested in the FOMC archive (dating back to 1996)
you can view all of the Fed's statements and minutes from these
meetings at this
http://www.federalreserve.gov/fomc/default.htm#2004

It is an EXCELLENT way to take a historical tour of the U.S.
economy.

Let's quickly take a look at today's internals.  Today's trade
was rather quiet, up until 02:15 PM EST.  I will explain why I
think the MARKETS were SURPRISED by today's Fed statement.  It's
not just price action in the major indices either.

Market Snapshot / Internals - 01/28/04 Close



Maybe NASDAQ traders got an early release of today's FOMC
statement before traders on the NYSE did, as the NASDAQ's A/D
line turned in favor of decliners at 12:00 PM EST.  Hopefully you
know that I'm kidding about NASDAQ traders getting any advanced
knowledge.

One sign of SURPRISE, and an unpleasant one for Treasury bulls
was the jump in YIELDS just after the FOMC announcement at 02:15
PM EST.  While the 10-year YIELD did edge up from its 12:10 PM
EST low YIELD of 4.027% into the 02:00 hour, a sharp round of
selling, as if bond bulls were SURPRISED took place.

Gold traders may also have been surprised.  Fellow analyst
Jonathan Levinson is constantly updating traders in the Futures
Monitor as to currency and gold prices.  Gold was trading a
session high just prior to the FOMC announcement.  At 02:20:37 PM
EST, just 5-minutes after the FOMC announcement Jonathan wrote,
"I can't get Globex quotes on gold or silver, but watching the
tankage in the Canadian dollar futures, euros and swiss francs
right now, it can't be pretty."

Currency traders in the dollar may also have been surprised.  The
U.S. Dollar Index (dx00y) 87.29 +1.17% jumped from 86.29 to
86.87, or +0.67% in just 5-minutes!

I made comment in the Market Monitor at 01:57:13, "Not that this
will help with trader response to FOMC announcement, but if the
BIX.X 356.35 +0.7% offers any clues at this point, it would be
that the Fed language is going to remain "foreseeable future."

I followed that comment at 14:06:15 (8-minute before the FOMC
announcement) with this intra-day chart of the S&P 100 Index
(OEX.X).

S&P 100 Index (OEX.X) - 10-minute intervals (02:00 PM EST)



Banks, which tend to benefit from a low interest rate environment
had broken above their MONTHLY R2 for the first time this month
and were trading new 52-week highs!  But the OEX wouldn't go, or
follow above its WEEKLY R1.

Both the S&P Banks (BIX.X) 348.11 -1.62% and S&P 100 Index
(OEX.X) 559.49 -1.35% went, as did just about everything else.
South!  As if SURPRISED!

OK... maybe the OEX not able to make a move above WEEKLY R1 and
MONTHLY R2 was a sign that market participants weren't overly
certain of what kind of phrasing the Fed was going to use, or
what type of response MARKET participants were going to give, but
the intra-day action of Treasuries, currencies, gold, banks and
broader equities certainly had the look of an unpleasant
surprise.

Pivot Analysis Matrix -



In PINK.  I've highlighted today's lows in the SPX and QQQ, and
also their WEEKLY S2s.  Two levels stick out in my mind as it
relates to notes I've made (especially in the Market Monitor) in
recent weeks regarding suspicious option volume.  On days with
either the VIX.X 16.78 +9.3% or VXN.X +9.24% traded lower
(usually associated with call buying), most active options on
these days were the QQQ $37 puts (as if selling the $37 puts) and
SPX 1,125 puts (as if selling the 1,125).  At the time of those
observations, I made the comments that the activity in those
options, in relation to a lower trade found in the VIX.X and
VXN.X suggested there might be a near-term "floor" of support
where institutions were selling those puts, with intention to buy
these levels.

I should add.  When making the QQQ $37 put observation, there was
also high volume levels found in the QQQ $38 puts.  At these
times, different month expiration trade was found, but the cost
of buying the $38 puts was equal to that of selling the near-
month $37 put.

If a trader were to trade off of this relationship, then a
current range from $37-$38 would be suggested for the QQQ.

I thought Jim Brown made a good comment late this afternoon (Jim
always makes good comments) when warning bears to not be overly
aggressive with shorting, and to well expect volatility.  Look at
tomorrow's DAILY S2-R2 range, which certainly suggests the
potential for volatility.

I've "X-d out" the WEEKLY Pivots in the INDU, SPX and OEX.
Intra-day trade showed these major indices cutting down through
these levels like a hot knife through butter.  I would currently
look for the WEEKLY Pivots to be a near-term level of resistance.

I did see some intra-day stability at the NDX/QQQ WEEKLY S1 and
MONTHLY R1 for about 20-minutes.  I profiled a QQQ bullish trade
in the market monitor at $37.40, and while the QQQ struggled to
$35.58, sellers overcame buyers, I was stopped out at $37.25 and
the QQQ fell directly to its WEEKLY S2.

The slicing through of the WEEKLY Pivots in the INDU/SPX/OEX is
not to say there wasn't buying taking place, but after the FOMC
announcement, I could not reset my buy and sell program premium
alert levels fast enough.  You can probably see from the intra-
day internals the BIG increase in volume from 02:00 PM EST to the
close, and institutions were active.

My main points here are for new entries, (long or short) keep
your position size small.  If you want to trade larger sized
positions, then follow with tighter stops.

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



The MONTHLY interval chart of the SPX shown earlier doesn't look
like as much selling took place as a daily interval bar chart of
the OEX does.  Intra-day trade had the appearance of a "garage
sale" where everything was sold, and it didn't matter at what
price.  I would have to view the WEEKLY Pivot as resistance as
stock bought at 561 by computers will most likely find some of it
being sold back at the WEEKLY Pivot.  Should the OEX fall much
below the WEEKLY S2 and rising 21-day SMA, then a trade lower to
553 is not out of the question.

Dow Industrials (INDU) Chart - Daily Intervals



I did not want to scare investors or traders into thinking that
the major indices will fall 22.4%, like that period noted in the
second chart of tonight's wrap.  However, a 7% to 15% decline
would be considered a "normal" correction for a major index after
a big bull run.

I personally, believe that while a 10% correction at some point
is in order, the amount of bullishness these markets have shown
in the past couple of months, where the bullish % charts have
remained so overbought, yet bullish, will have the major indices
higher by year's end than witnessed earlier this week.  Still, I
would not want to be "too wrong" and show bullish complacency.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals



The Q's saw heavy volume today, nearly equaling the 112.3 million
shares found on January 21, the day after the QQQ traded its
recent 52-week high of $39.00.  I make note that the Q's have
fallen 5.1% from that peak high.  While the QQQ looks near-term
"oversold" it is an index of momentum.  Bulls can pick away, but
I'd use a tight stop.  In recent months, the Q's have tended to
move in equal $1 increments, and I would suggest $0.25 stops from
an entry point if at all possible.  With the Q's once again
piercing below the upward trend from the March lows, I've placed
a conventional downward trend from the recent high, where I would
begin to deem $37.97 as a more formidable level of resistance.

Jeff Bailey


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The Option Investor Newsletter                Wednesday 01-28-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: APOL
Dropped Puts: None
Spreads, Combinations & Premium-Selling Plays: Finally...A
    "Reality" Check!
Watch List: Fading Fast


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

None

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

Apollo Group - APOL - close: 71.30 change: -1.27 stop: 71.00

Yesterday's reversal in APOL made us nervous, as it came following
a rejection from the $74 level, representing the first lower high
since the early December selloff.  It turns out our concerns were
well founded, as the stock gapped lower today, falling below $72
support and trading weakly throughout the day.  The bearish market
action following the FOMC announcement put the finishing touches
on the play, driving APOL below our $71 stop.  Clearly the uptrend
has now been broken and it's time to move on.  Remaining long
positions should be sold into any rebound tomorrow morning.

Picked on January 13th at    $72.63
Change since picked:          -1.33
Earnings Date               3/18/04 (unconfirmed)
Average Daily Volume =     1.83 mln



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

None


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Full Service Brokers

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

Live Broker and Online Trading Available     888-281-9569

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*********************************************
SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS
*********************************************

Finally...A "Reality" Check!
By Ray Cummins

The major equity averages plunged Wednesday as mediocre economic
data and some "inflationary" comments by the FOMC conspired to
put investors in a selling mood.

As expected, the Open Market Committee left rates unchanged, with
the federal funds rate targeted at 1.00%.  However, the statement
that "policy accommodation can be maintained for a considerable
period" was amended to "the committee believes that it can be
patient in removing its policy accommodation."  After the news,
stocks took a dive with the Dow falling 141 points to 10,468 on
weakness in Hewlett Packard (NYSE:HPQ), Alcoa (NYSE:AA) and Home
Depot (NYSE:HD).  Despite some surprising relative strength in
chip shares, the NASDAQ Composite fell 38 points to 2,077.  The
Standard & Poor's 500 Index slid 15 points to 1,128 as airline,
homebuilder, oil service, and retail issues moved lower.  In the
broader market, decliners outpaced advancers by a 2 to 1 margin
on volume of 1.51 billion, while technology losers paced winners
by a slightly higher ratio on volume of 1.92 billion.  U.S. bonds
were initially boosted by the weaker-than-expected economic data
but retreated after the FOMC's decision.  The benchmark 10-year
Treasury note fell 29/32 while its yield, which moves inversely
to price, climbed to 4.19%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 01/27/03
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

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

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NAKED PUTS

Stock   Strike Strike Cost  Current   Gain    Max    Simple
Symbol  Month  Price  Basis  Price   (Loss)  Yield   Yield

SEPR     FEB    20    19.60  27.60    0.40   21.62%   2.04%
CECO     FEB    40    39.30  50.48    0.70    5.04%   1.78%
ERES     FEB    27    27.00  35.97    0.50    5.07%   1.85%
MICC     FEB    65    64.05  78.03    0.95    4.10%   1.48%
NTES     FEB    40    38.90  47.43    1.10    7.39%   2.83%
RMBS     FEB    25    24.50  31.80    0.50    5.60%   2.04%
SEPR     FEB    22    21.90  27.60    0.60    7.02%   2.74%
SINA     FEB    40    38.75  47.21    1.25    7.89%   3.23%
SOHU     FEB    30    29.30  37.89    0.70    6.72%   2.39%
APPX     FEB    35    34.35  36.25    0.65    5.65%   1.89%
CRDN     FEB    40    39.05  45.07    0.95    7.15%   2.43%
GPRO     FEB    32    32.10  37.35    0.40    4.17%   1.25%
KYPH     FEB    25    24.45  29.95    0.55    6.84%   2.25%
IMCL     FEB    35    34.15  43.26    0.85    8.93%   2.49%
OSIP     FEB    30    29.60  35.86    0.40    4.67%   1.35%
PCLN     FEB    17    17.15  20.70    0.35    6.93%   2.04%
SEPR     FEB    22    22.05  27.60    0.45    7.00%   2.04%


NAKED CALLS

Stock  Strike Strike Cost  Current   Gain    Max    Simple
Symbol Month  Price  Basis  Price   (Loss)  Yield   Yield

CYD      FEB    35   35.45  22.89    0.45   6.36%    1.27%
SNDK     FEB    80   81.10  58.14    1.10   5.97%    1.36%
ISIL     FEB    30   30.50  25.23    0.50   6.00%    1.64%
MCHP     FEB    35   35.45  28.65    0.45   4.57%    1.27%
UTSI     FEB    40   40.95  35.18    0.95   8.23%    2.32%


PUT-CREDIT SPREADS

Symbol  Pick   Last   Month L/P S/P Credit  C/B    G/L   Status

COCO    60.73  64.50   FEB  55  55   0.65  54.35   0.65   Open
KOSP    45.30  51.52   FEB  35  40   0.60  39.40   0.60   Open
CEPH    54.65  54.94   FEB  45  50   0.65  49.35   0.65   Open
NFLX    65.10  75.19   FEB  48  50   0.25  49.75   0.25   Open
CFC     80.32  83.50   FEB  70  75   0.65  74.35   0.65   Open
MDC     66.31  66.50   FEB  55  60   0.60  59.40   0.60   Open
GILD    65.37  61.06   FEB  55  60   0.55  59.45   0.55   Open


CALL-CREDIT SPREADS

Symbol  Pick   Last   Month L/C S/C Credit  C/B    G/L   Status

ANF     24.90  25.86   FEB  30  27   0.30  27.80   0.30   Open
MANH    27.00  27.84   FEB  35  30   0.50  30.50   0.50   Open
ESV     27.45  29.50   FEB  35  30   0.45  30.45   0.45   Open
NVLS    41.68  34.40   FEB  47  45   0.40  45.40   0.40   Open
HTCH    32.45  30.28   FEB  40  35   0.60  35.60   0.60   Open
ICST    27.60  26.00   FEB  35  30   0.50  30.50   0.50   Open

The bearish spread in Checkfree (NASDAQ:CKFR) has previously been
closed for a small loss.

Questions & comments on spreads/combos to Contact Support

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.  The positions with "*" will be
included in the weekly summary.  Those with "TS" (Target-Shoot)
are below our minimum monthly return, but may offer a favorable
entry price with a limit order, due to the daily volatility of
the underlying issue.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - NAKED PUTS

All of these issues have robust option premiums and relatively
favorable technical indications.  However, current news and market
sentiment will have an effect on these stocks, so review each play
thoroughly and make your own decision about its future outcome.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

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

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BRCM - Broadcom  $41.63  *** Solid Earnings! ***

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

BRCM - Broadcom  $41.63

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 37.5  RCQ NT    7325   0.50  37.00   5.1%   1.4% *
SELL PUT  FEB 40    RCQ NH   13687   1.05  38.95   8.6%   2.7%


__________________________________________________________________

CLZR - Candela  $26.06  *** Multi-Year High! ***

Candela (NASDAQ:CLZR) develops, manufactures, and distributes
innovative clinical solutions that enable physicians, surgeons,
and personal care practitioners to treat selected cosmetic and
medical conditions using lasers, aesthetic laser systems, and
other advanced technologies.  Founded near Boston in 1970, the
company markets and services its products in over 60 countries
from offices in the United States, Europe, Japan and other Asian
locations.  Candela established the aesthetic laser market 14
years ago, and currently has an installed base of over 6,000
lasers worldwide.

CLZR - Candela  $26.06

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 22.5  UKZ NX     122   0.30  22.20   5.5%   1.4% *
SELL PUT  FEB 25    UKZ NE      65   0.90  24.10  11.6%   3.7%


__________________________________________________________________

DRIV - Digital River  $25.44  *** Consolidation Complete? ***

Digital River (NASDAQ:DRIV) is a provider of electronic commerce
outsourcing solutions.  As an application service provider, the
company enables its clients to access its proprietary electronic
commerce system over the Web.  Their technology platform allows
the company to provide a suite of electronic commerce services,
including Web commerce development and hosting, transaction
processing, fraud screening, digital delivery, integration to
physical fulfillment and customer service.  The firm also has
analytical marketing and merchandising services to assist its
clients in increasing page view traffic to, and sales through,
their Web commerce systems.

DRIV - Digital River  $25.44

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 22.5  DQI NX     366   0.55  21.95   9.3%   2.5% *
SELL PUT  FEB 25    DQI NE     250   1.45  23.55  17.1%   6.2%


__________________________________________________________________

NANO - Nanometrics  $20.79  *** The "Nano" Craze! ***

Nanometrics (NASDAQ:NANO) designs, manufactures, markets and
supports the thin film metrology systems for the semiconductor,
flat panel display and magnetic recording head industries.  The
company's measurement systems use microscope-based, non-contact
spectroscopic reflectometry.  Some of the firm's systems provide
complementary spectroscopic ellipsometry to measure the thickness
and optical characteristics of films on a variety of substrates.
In addition, the firm has both integrated and standalone optical
critical metrology systems to measure critical dimensions of the
patterns on semiconductor wafers.  The company also manufactures
a line of optical overlay registration systems that are used to
determine the alignment accuracy of successive layers of chip
patterns on wafers in the photolithography process.

NANO - Nanometrics  $20.79

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 17.5  QNK NW      10   0.45  17.05  10.9%   2.6% *
SELL PUT  FEB 20    QNK ND     191   1.25  18.75  18.8%   6.7%


__________________________________________________________________

NTAP - Network Appliance  $22.70  *** Entry Point? ***

Network Appliance (NASDAQ:NTAP) is a provider of enterprise
network storage and data management solutions.  NetApp network
storage solutions and service offerings provide data-intensive
enterprises with consolidated storage, improved data center
operations, economical business continuance and efficient remote
data access.  The company's solutions meet the needs of archive,
reference, departmental/remote office, business internal and
business operations, and business-critical data with a common
product architecture and data management methodology.

NTAP - Network Appliance  $22.70

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 20    NUL ND    1721   0.45  19.55   8.7%   2.3% *
SELL PUT  FEB 22.5  NUL NX    7965   1.30  21.20  16.9%   6.1%


__________________________________________________________________

OSTK - Overstock.com  $20.80  *** Favorable Earnings! ***

Overstock.com (NASDAQ:OSTK) is an online "closeout" retailer
offering discount, brand-name merchandise for sale primarily
over the Internet.  The company's merchandise offerings include
bed-and-bath goods, kitchenware, watches, jewelry, electronics,
sporting goods and designer accessories.  Overstock offers its
customers an opportunity to shop for bargains conveniently,
while offering an alternative inventory liquidation distribution
channel to its suppliers.  The company typically offers around
5,000 non-media products and over 100,000 media products (books,
CDs, DVDs, video cassettes and video games) in seven departments
on its Websites, www.overstock.com, www.overstockb2b.com and
www.worldstock.com.

OSTK - Overstock.com  $20.80

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 17.5  QKT NW    1039   0.50  17.00  12.0%   2.9% *
SELL PUT  FEB 20    QKT ND      43   1.20  18.80  18.2%   6.4%


__________________________________________________________________

SEPR - Sepracor  $27.42  *** Drug Sector Favorite ***

Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company
dedicated to treating and preventing human disease through the
discovery, development and commercialization of pharmaceutical
compounds, including product candidates directed toward serving
unmet medical needs.  The firm's proprietary compounds are either
single-isomer or active metabolite forms of existing drugs, which
Sepracor refers to as improved chemical entities, or new chemical
entity compounds, which are unrelated to current products.

SEPR - Sepracor  $27.42

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  FEB 22.5  ERQ NX    2143   0.25  22.25   5.2%   1.1% *
SELL PUT  FEB 25    ERQ NE    2102   0.60  24.40   8.7%   2.5%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

CVH - Coventry Health Care  $64.46  *** 3-for-2 Split Coming! ***

Coventry Health Care (NYSE:CVH) is a managed healthcare company.
The firm operates health plans under the names Coventry Health
Care, Coventry Health and Life, Carelink Health Plans, Group
Health Plan, HealthAmerica, HealthAssurance, HealthCare USA,
Southern Health and WellPath.  Coventry operates a diversified
portfolio of local market health plans serving 14 states, mainly
in the Mid-Atlantic, Midwest and Southeast regions.  The firm's
health plans generally are located in small- to mid-sized cities.
The company operates four regional service centers that perform
claims processing, billing and collection, enrollment and customer
service functions for its plans.  These regional service centers
enable Coventry to take advantage of economies of scale, implement
standardized management practices at each of its health plans and
capitalize on the benefits of integrated information technology.

CVH - Coventry Health Care  $64.46

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-55.00  CVH-NK  OI=262  ASK=$0.20
SELL PUT  FEB-60.00  CVH-NL  OI=529  BID=$0.65
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$59.50


__________________________________________________________________

SII - Smith International  $48.80  *** Rally Mode! ***

Smith International (NYSE:SII) is a worldwide supplier of premium
products and services to the oil-gas exploration and production
industry, the petrochemical industry and other industrial markets.
The company provides a range of technologically-advanced products
and engineering services, including drilling and completion fluid
systems, solids-control equipment, waste-management services,
three-cone and diamond drill bits, fishing services, drilling
tools, underreamers, casing exit and multilateral systems, packers
and liner hangers.  The firm also offers supply-chain management
solutions through an extensive network providing pipe, valve, tool,
safety and other maintenance products.

SII - Smith International  $48.80

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-42.50  SII-NV  OI=305   ASK=$0.25
SELL PUT  FEB-45.00  SII-NI  OI=1682  BID=$0.50
INITIAL NET-CREDIT TARGET=$0.30-$0.40
POTENTIAL PROFIT(max)=14% B/E=$44.70



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option is the strike price (of the underlying stock) that
is sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond the sold
strike, or using a "buy-to-close" stop order at a price that is no
more than twice the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

AEIS - Advanced Energy  $22.68  *** Sell-Off Underway! ***

Advanced Energy Industries (NYSE:AEIS) designs, manufactures and
supports a group of primary components and subsystems for vacuum
process systems.  The firm's core products are very complex power
conversion and control systems.  Its products also control the
flow of gases into the process chambers and provide them with
thermal control and sensing within the chamber.  The company's
customers use its products in plasma-based thin film processing
equipment that is essential to the manufacture of semiconductors;
compact discs, DVDs and other digital storage media; flat panel
computer and television screens; coatings for architectural glass
and optics, and power converters for advanced technology computer
workstations and servers.

AEIS - Advanced Energy  $22.68

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  FEB 25    OEQ BE     38    0.55  25.55  10.0%   2.2% *
SELL CALL  FEB 22.5  OEQ BX     15    1.50  24.00  18.4%   6.3%


__________________________________________________________________

ELX - Emulex  $27.53  *** Mediocre Earnings? ***

Emulex (NYSE:ELX) is a designer, developer and supplier of a
line of storage networking host bus adapters and application
specific computer chips that provide connectivity solutions for
storage area networks, network-attached storage and redundant
array of independent disks storage.  HBAs are the basic data
communication products that enable servers to connect to storage
networks by offloading processing tasks as information is
delivered and sent to the network.  The company's products are
based on internally developed ASIC and embedded firmware and
software technology, and offer support for a wide variety of
SAN protocols, configurations, system interfaces and operating
systems.

ELX - Emulex  $27.53

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  FEB 30    UMQ BF    6506   0.45  30.45   6.6%   1.5% *
SELL CALL  FEB 27.5  UMQ BY    2735   1.25  28.75  13.4%   4.3%


__________________________________________________________________

PHM - Pulte Homes  $43.71  *** Bearish Sector! ***

Pulte Homes (NYSE:PHM) is a holding company whose subsidiaries
engage in the homebuilding and financial services businesses.
The company's direct subsidiaries include Pulte Diversified
Companies, Inc. (PDCI), Del Webb Corporation and others that
are engaged in the homebuilding business.  PDCI's operating
subsidiaries include Pulte Home Corporation (PHC), Pulte
International Corporation and other subsidiaries that are
engaged in the homebuilding business.  The company also has a
mortgage banking company, Pulte Mortgage Corporation, which is
a subsidiary of PHC.

PHM - Pulte Homes  $43.71

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  FEB 47.5  PHM BW    1300   0.50  48.00   4.7%   1.0% *
SELL CALL  FEB 45    PHM BI    2670   1.20  46.20   9.1%   2.6%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BZH - Beazer Homes  $92.40  *** Homebuilders Slump! ***

Beazer Homes USA (NYSE:BZH) designs, builds and markets single
family homes in the following locations within the United States:
Florida, Georgia, North Carolina, South Carolina, Tennessee,
Arizona, California, Colorado, Nevada, Texas, Maryland, Virginia,
New Jersey, and Pennsylvania.  The company designs its homes to
appeal primarily to entry-level and first time move-up homebuyers.
The firm's objective is to provide its customers with homes that
incorporate quality and value while trying to maximize its return
on invested capital.  Beazer's homebuilding and sales activities
are conducted under the name of Beazer Homes except in Colorado
(Sanford Homes) and Tennessee (Phillips Builders).

BZH - Beazer Homes  $92.40

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-105.00  BZH-BA  OI=946   ASK=$0.25
SELL CALL  FEB-100.00  BZH-BT  OI=1085  BID=$0.75
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$100.55


__________________________________________________________________

KSS - Kohl's  $42.67  *** Next Leg Down? ***

Kohl's (NYSE:KSS) operates family-oriented, specialty department
stores.  The company's stores sell moderately priced apparel,
shoes, accessories and home products targeted to middle-income
customers shopping for their families and homes.  Kohl's stores
have fewer departments than traditional, full-line department
stores, but offer customers assortments of merchandise displayed
in complete selections of styles, colors and sizes.  Since 1992,
the company has increased square footage an average of 22% per
year, expanding from 79 stores located in the Midwest to a total
of over 400 stores with a presence in six regions.  Of the stores
it operates, over 100 are take-over locations, which facilitated
the entry into several new markets, including Chicago, Illinois;
Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia,
Pennsylvania; St. Louis, Missouri, and the New York region.

KSS - Kohl's  $42.67

PLAY (less conservative - bearish/credit spread):

BUY  CALL  FEB-50.00  KSS-BJ  OI=7645  ASK=$0.10
SELL CALL  FEB-45.00  KSS-BI  OI=6252  BID=$0.60
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$45.55


__________________________________________________________________

LEN - Lennar  $43.71  *** A Big "Down" Day! ***

Lennar (NYSE:LEN) is a homebuilder and a provider of residential
financial services.  The company's homebuilding operations include
the sale and construction of single-family attached and detached
homes as well as the purchase, development and sale of residential
land directly and through its unconsolidated partnerships.  The
company's financial services operations provide mortgage financing,
title insurance and closing services for both its homebuyers and
others, resell the residential mortgage loans it originates in the
secondary mortgage market and also provide Internet access, cable
television and alarm monitoring services to residents of its many
communities.

LEN - Lennar  $43.71

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-50.00  LEN-BJ  OI=3836  ASK=$0.20
SELL CALL  FEB-47.50  LEN-BW  OI=6493  BID=$0.45
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$47.80



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

SEE DISCLAIMER - SECTION 1

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


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

Fading Fast
___________________________________________________________________

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.
___________________________________________________________________


Whole Foods Market Inc - WFMI - close: 67.52 change: -1.28

WHAT TO WATCH:  WFMI has been in a rising channel for months
dating back to last July.  The stock actually broke out through
the upper edge of its channel in mid-January to peg its point &
figure price target at $71.  Now shares appear to be rolling over
under the $70 level.  Traders might want to consider a drop
through its simple 50-dma or the $65 mark as a breakdown through
support and a potential bearish entry.  Earnings should be Feb.
11th.

Chart=


---

Gilead Sciences - GILD - close: 61.02 change: -0.04

WHAT TO WATCH:  After a few days of consolidation it looks like
GILD might be setting up for another bullish entry point.  The
stock faded back to price support at $60 and actually traded to
$59.93 before investors bought the dip.  GILD also has technical
support at its 200-dma near 57.50 and its 50-dma above that.  The
real test will be after GILD's earnings report, which is due out
tomorrow after the closing bell.

Chart=


---

CDW Corp - CDWC - close: 67.60 change: -1.56

WHAT TO WATCH:  CDWC has enjoyed a very strong January trading
from $58 to $70 over the course of the month.  Now the rally
looks tired and shares could be setting up for a fall.  Yesterday
CDWC produced a small failed rally at $70 and today's drop
represents some follow through on the move but shares have
stalled at their 10-dma.  Aggressive traders could open bearish
traders here with a target near 62.50, but watch out for possible
support at $65.

Chart=


---

Barr Pharmaceuticals - BRL - close: 74.15 change: -1.80

WHAT TO WATCH:  Previously known as Barr Labs, BRL has been
unable to break through its 50-dma for the last several days.
Now shares are rolling over and look set to test support at the
$70 mark.  Nimble traders might want to try scalping the move but
watch out for possible support at $72.00, which represents the
bottom of the recent gap.  Its current p&f price target is $60.

Chart=



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

IBM $97.38 -1.42 - Yesterday we listed IBM on the watch list due
to its bearish harami candlestick pattern.  Today's drop confirms
the pattern and we can expect additional weakness.  The first
line of support is its 10-dma but we'd wait for a bounce from the
$95 level.

CECO $47.10 -3.38 - Shares dropped 6.69% today, breaking its
rising trend and creating a sell signal on its MACD.  It might
feel like a chase but this could be the beginning of a move to
its 200-dma near $41.

PDCO $65.88 -1.42 - PDCO appears to be reversing course and
closing at the low of the day is not a good sign for tomorrow.
Bearish traders might consider a move under support at $65 as an
entry with a target of $60.


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