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Daily Newsletter, Thursday, 01/29/2004

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The Option Investor Newsletter                Thursday 01-29-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Buy The Dip?
Futures Markets: Dollar Breakout, Metal Breakdown
Index Trader Wrap: See Note
Market Sentiment: Finicky Investors


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-29-2004           High     Low     Volume Advance/Decline
DJIA    10510.29 + 41.90 10522.59 10417.85 2.43 bln   1171/2078
NASDAQ   2068.23 -  9.10  2087.33  2041.07 2.64 bln   1059/2131
S&P 100   563.10 +  3.61   563.33   557.36   Totals   2230/4209
S&P 500  1134.11 +  5.63  1134.39  1122.38
W5000   11045.72 + 28.80 11058.26 10932.72
RUS 2000  579.86 -  4.05   586.81   573.34
DJ TRANS 2971.99 +  4.30  2986.68  2948.35
VIX        17.14 +  0.36    17.66    16.79
VXO (VIX-O)17.11 +  0.01    18.01    16.93
VXN        25.20 +  0.04    26.24    25.05
Total Volume 5,521M
Total UpVol  2,022M
Total DnVol  3,415M
Total Adv  2523
Total Dcl  4784
52wk Highs  271
52wk Lows    16
TRIN       0.85
NAZTRIN    0.90
PUT/CALL   0.80
************************************************************

Buy The Dip?

Some traders bought the dip as the indexes neared critical
support but there was no V bottom blast off as many had
hoped. The low of the day came around 2:PM with alternating
buy/sell programs fighting for control. Is this the bottom
or better yet, is this the correction we needed?

Dow Chart - Daily



Nasdaq Chart - Daily



The morning started off with another drop of -1,000 in the
Jobless Claims but with the prior weeks number revised up
+2,000 the net result was a rise. Regardless of how you add
it up it was just one more week without any jump in the
numbers. This was the third week in the 343,000 range and
the four week moving average came in at 346,000. The total
insured unemployment rate is down to 2.5% from the peak at
3.0% in late May. We are going in the right direction but
we are not going very fast. Forty-seven states saw a drop
in claims for last week. Florida had the largest gain in
claims due to numerous layoffs.

The Employment Cost Index jumped +0.7% for the 4Q but it was
less than analysts had expected at +0.9%. Wages dropped but
health care benefit costs rose. The drop in wages and the
outsourcing of jobs is helping companies tack on additional
earnings but slowly depressing real income. It is a good
thing inflation is very low or the middle to lower income
workers would really be suffering. Wages grew by only +2.9%
for the year while employment costs rose +3.8%. Benefit
costs rose +1.2% in the 4Q and +6.3% for the year.

The Chicago Fed National Activity Index came in at only
+0.13 for December and well below the +0.68 for November.
That November number was revised upward from +0.55 and
indicated a stronger bounce in the middle of the quarter
and a fall off in December. Output components only added
+0.05 to the index and well off the +0.54 contribution in
November. Employment fell for the 11th straight month. Only
44 of the 85 components were positive for the period. One
analyst said the headline number of +0.13 clearly showed
that the economic recovery was gaining strength thanks to
strong productivity growth. Sorry, I see a significant
drop from November and a barely breakeven ratio on the
components. It was the fourth consecutive positive month
although it was only barely positive. Let's count our
blessings and not worry over what could be in the future.

The Help Wanted Index dropped one point to 38 but should
not be considered a negative event. It has been holding
the 37-38 range since June. The negative connotation would
be due to the lack of a gain. If advertising for employees
is not picking up then the Jobs report next Friday could
also be flat. Analysts would love to have seen even a small
jump over 40 to suggest a pickup in employment activity but
they will have to wait for at least another month. If the
economy is improving you would think employment advertising
should be showing at least a minor increase. This always
causes analysts to suspect the economic growth is not as
robust as they hoped. Next Friday we get the answer. There
is always the chance that consulting firms, internet job
firms, search networks and the flood of unsolicited
resumes are taking away the need for those advertisements.

To confirm that thought process the Labor Turnover Survey
also out today showed that layoffs are down -14% from year
ago levels. Job openings have increased by +1.8% and new
hires are up +3.1%. This was only the second month since
the survey began in 2000 that there was a year over year
increase in job openings. According to the JOLTS numbers
the bottom in the labor market was in Aug/Sep 2003 and
hiring has been increasing, although slowly, since then.
The catch with this report is the reporting period. This
is a November period and light years behind the market
in terms of revelance. Traders want to know what happened
last week not three months ago. This does suggest that
data from other more current sources like the ISM surveys
will continue to show improvement in hiring and that
improvement will eventually end up in the JOLTS data.

There is also the problem with the type of new jobs being
created. New Wal-Mart's, Starbucks, Home Depots and new
fast food restaurants are creating new jobs faster than
the jobs report is showing. This suggests that we are
seeing the cheapening of the work force. (no offense
to those readers in those professions) I am merely drawing
a conclusion that although jobs are being created they
are not the jobs most people would be excited about.

The FOMC minutes for December came out at 2:PM and they
are credited with the afternoon drop in the market. Not
the actual minutes but the fear of the minutes as the
drop came between 1:15-1:45. The minutes clearly described
why the Fed removed the considerable period statement this
month. They viewed it as restricting their flexibility to
respond to changing conditions. The minutes were also more
bearish in tone with greater worries that inflation could
ramp up at any time and they wanted to be prepared to take
a preemptive strike if need be. The members also expressed
concern for the rising budget deficit and the eventual
impact on the economy.

Several members argued to remove the statement in the
December meeting suggesting they were getting ready to
raise rates and needed to clear the table for the next
series of rate hikes. Ugly thought! Instead of an immediate
drop they added the phrase associating it with economic
conditions to warn the markets there was a change coming.
As we know from the past six weeks the markets ignored the
warning. That market stance of burying its head in the sand
brought the Fed no choice but to change the statement to
plain language at this weeks meeting. So much for the soft
landing. We didn't listen and they had to hit us harder.
The members also expected the unemployment rate to drop
over the coming quarters as a result of the rising economy.
Now we can see why they were shocked when the December Jobs
report was barely positive. In general they are not really
worried about inflation and could still see a potential
deflationary period ahead. They view the risk to each
direction as now equal. They just wanted to be ready to
react if the inflation monster won the battle and sprang
from the bushes. With capacity utilization still at 75%
the odds of impending inflation are very slim.

Bonds finished flat for the day and after the ramp job
yesterday it is amazing we did not see a sell off. It is
even more amazing when you consider there is $80 billion
in new supply coming to market through next week. The
government has to fund that deficit and somebody will
get the interest.

The market reaction to the Fed news both in bonds and
equities was over done in the opinion of most analysts.
However, while nobody thinks they will raise rates soon
it is the discounting process that we are seeing now.
When the Fed was seen to be on hold until 2005 the markets
had factored in that lack of change for the next 6-9 months.
That is exactly what the markets are supposed to do. They
factor earnings, rates and economic prosperity for 6-9
months in advance. A change in one prompts a change in
the others. We need to also remember that rate hikes
do not come one at a time. The Fed is not going to raise
1/4 point and then go dormant for a couple years. They
raise for a reason and every rate adjustment takes 6-9
months to work its way through the markets. Normal cycles
involve 3-5 rate changes over an 18-month period. So, the
markets are not just factoring in a potential rate hike
in May, which is the new target, but they are factoring
in the entire rate hike cycle which could begin in May.
See, it really is a trend change in progress.

The good news is the reason for the hikes. If the Fed
does hike rates in May it will be because the economy
has exploded fast enough to generate inflation. Think
about that. We are currently crawling along in terms
of economic growth that we can see as in job creation.
However earnings are exploding. We are seeing raised
guidance by the majority of companies and the body
language of the confessors is positive. They are not
hunkered down behind their figurative podium in flak
jackets when they announce. They are generally proud
of the results and optimistic about the future. This
is a complete change from just six months ago. The
bottom line is that the growth has to expand significantly
from even the current level to invoke a rate hike and
at the present rate that may not happen anytime soon.
The message to the markets should be don't get yourself
in a tizzy because nothing fundamental really changed.

However, there was a major change in the tone of the
stock market. We have had three major distribution days
so far this week. Strong volume with declining volume
substantially higher than advancing volume. New 52-week
highs on Thursday were 274 and a level not seen since
October 24th. The semiconductor sector crashed to a
support level not seen since early December. The SOX
broke its 50 dma at 515 and came within two points of
next support at 500. Considering chip stocks were up the
strongest of any sector over the last few months it is
no surprise they were the hardest hit. In fact the SOX
lows on Thursday were more than -10% off the January
highs. A REAL correction!

SOX Chart - Daily



The Russell also took it on the chin with a -5% drop
back to 573.00 from its 601 high from Tuesday. A -5%
drop in three days is a significant hit. Putting it in
perspective the Dow barely blinked. We saw a drop back
to 10417 intraday on Thursday and close enough to 10400
to call it a successful test of support for me. That
was only a -2.7% drop from its 10705 high from Monday.
The real damage came from the Nasdaq, which dropped
-112 points from its 2152 high on Monday. I say real
damage because that was a -5% drop on a highly visible
index. Remember this is on mostly better than expected
earnings. The afternoon rebound on Thursday was simply
an oversold reaction in front of the GDP report and not
necessarily a sign that the worst is over.

Ok, now what? The key is the GDP report on Friday morning.
It also helps that we have the NY-NAPM, Chicago-PMI and
Consumer Sentiment at the same time. If I had to take an
unbiased look at just the indexes and predict a direction
without factoring in the bullish sentiment I would expect
at least one more down day in our future and maybe several.
None of the major indexes have even come close to their
real support at the 50 dma except the SOX. The levels
for the respective indexes are:

Current - 50-dma

579   - 558   Russell
1094  - 1134  Spx
2068  - 2005  Nasdaq
10510 - 10208 Dow
11045 - 10661 Wilshire 5000

The SOX is the only major index of note to break its 50
dma during this sales event. Based on simple technical
analysis and recent historical trends the major markets
should all test that level. But, we still have to factor
in the bullish sentiment and economic conditions.

Basically the conditions are good and the sentiment is
still off the wall bullish. The economic conditions will
be tested over the next six trading days with a barrage
of reports ending in the Nonfarm Payrolls next Friday.
These reports will either push the rest of the undecided
sellers off the fence or convince the dip buyers to go
shopping for bargains.

The GDP on Friday is the first big motivator. The real
consensus estimate is about +5.2% with the whisper numbers
still running around +6.5%. We have to assume the Fed
knew the GDP numbers in advance and factored them into
their statement. If the GDP was weaker than expected
would they have wanted to roil the markets only to have
them tank again two days later when the GDP was released.
Stranger things have happened but I am not expecting it.
If we do get a decent GDP I would expect the markets to
react favorably. Friday is also month end and I would
expect some window dressing from funds with excess cash
on hand. I would expect that window dressing to trigger
some short covering from those who profited from the drop.
A bad GDP will just add fuel to the profit taking fire.

Obviously this is all speculation and anything is possible.
We are well off the highs but also well above normal support.
That gives us plenty of room to wander without breaking any
real support or resistance levels. We can remain range bound
within a broad range until after the Jobs report next Friday.
I would then expect the markets to go directional once again.
While I could rationalize a touch of the 50 dma on all the
averages I would be very surprised to see it. When you
consider I have been looking for a -500 point Dow pullback
since Jan-1st that should give you some idea of my current
mindset. I can see us moving lower, I would just be surprised
if it was that much lower given the current sentiment. I
have said all along there was a buying opportunity in our
future and this is it. About the only thing that could ruin
it for me would be a massive negative surprise in the economic
reports. I am betting against that possibility and went long
on the dip today.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Dollar Breakout, Metal Breakdown
Jonathan Levinson

The US Dollar Index broke above the trendline in place since the
top of the November bounce high as gold broke below the rising
support line in place since the August low.  Equities and
treasuries broke to new lows but bounced in the late afternoon to
finish unchanged in the former case and lightly positive in the
latter.

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 US Dollar Index tested resistance at 88 before pulling back
to the 87.55 level as of this writing.  The move coincided with
with weakness through most of the session in equities and
treasuries that corrected in the last hour, and new lows for the
move in gold, silver, the mining indices and the CRB, with that
latter index getting smoked for 6.22 points to finish at 260.77,
led lower by silver, gold and platinum futures.


Daily chart of February gold


February gold got croaked for 2.64% to close at 398.90, down
10.80 points and reaching a low of 396.20 before a weak bounce.
March silver was sold for 3.02%, and the mining indices declined
by an equivalent amount, XAU –2.34% to 94.05 and HUI –2.86% to
213.18.  What was looking like a daily cycle bottom yesterday
feel apart today, with an ugly downside gap printed below 410,
the session high at 409.70.  I've highlighted the downside
support levels from here, and given the secondary USD Index
resistance line indicated above, gold bulls can be looking for
the nearly-oversold daily cycle oscillators to begin seeking a
bottom.  A failure of 392 would obviously change that
interpretation and would likely correlate to an upside break of
secondary resistance by the USD Index.


Daily chart of the ten year note yield


The Fed opened with a modest drain via open market operations,
and then followed it up with a surprise 6B 7-day repo to bring
the daily net back to positive.  I credit this bonus liquidity
with the doji top printed on the daily yield candle for the TNX,
which finished the day flat, up 0.2 bp to close at 4.197%.  A 26B
two-year treasury note auction generated a below-average bid-to-
cover ratio of 1.87.  Resistance at 4.27% is followed by
trendline resistance at 4.34%.  The daily cycle oscillators
continue to point north.


Daily NQ candles


NQ was the weakest of the equity contracts today, lagging the YM
and ES which traded mostly in lockstep.  The drop in the morning
left a long doji tail on the daily candle reaching to within 2
points of the lower daily Bollinger band.  This reversal pattern
sets up support in that area, but the lower low and lower high
confirms that the daily cycle downphase is in full swing.  Lower
channel trendline support is just above 1430, from which the
broader uptrend would be tested as well as the more advanced
daily cycle downphase.  For the time being, the bias on this time
frame remains to the downside, in conjunction with the oscillator
downphase.  For the day, the NQ gained 5 points to finished at
1499, +.33%.


30 minute 20 day chart of the NQ


The NQ bounced after a number of false bottoms on the 30 minute
cycle oscillators throughout the morning.  The rapid drop in
price from yesterday afternoon allowed the price to get ahead of
the 10 day stochastic, and the result was a steep bullish
oscillator divergence.  The sharp bounce that resulted brought
the NQ to shallow positive territory, failing at first resistance
at 1500.  Bollinger resistance on this timeframe at 1503 is just
north of the session high of 1502.50.  While we would ordinarily
expect the bounce to follow through tomorrow morning, which it
might well do, the strong daily cycle downphase is expected to
keep a lid on the 30 minute minute cycle upphases and produce a
pattern of lower highs.  The steepness of that daily downphase
will be determined by how quickly the current 30 minute upphase
fails.  With market moving news due at 8:30AM tomorrow, the
morning should be action-packed, whichever way the current
deadlock breaks.  Next support is at 1492, followed by 1475-80.
Note that it was a very heavy volume day for the Nasdaq, with
2.7B shares changing hands.  142.9M QQQ traded, setting up
today's range as either a consolidation at relative lows, or more
distribution on the way down.  Tomorrow will tell the tale.


Daily ES candles


ES gained 1 to finish at 1130.25, the move completing a steep
bullish doji hammer that closed right below yesterday's failed
trendline.  Like our dilemma with the heavy QQQ/COMPX volume, the
daily ES print will prove to have been either a deadcat
bounce/return to the scene of the crime, or a meaningful reversal
from a higher low.  Current resistance is at 1133-4, support at
1125, followed by 1115-18.

20 day 30 minute chart of the ES


The 30 minute ES bounced from the same dramatic bullish
stochastic divergence but failed at a lower high, also confirming
the daily cycle downphase that kicked off just yesterday.  Bulls
have mild resistance up to 1135, followed by 1142 and 1149.  The
question is whether the steep oscillator divergence has already
delivered its punch, or whether the bulls have enough to extend
this 30 minute cycle upphase into something more meaningful.  I
suspect that it will be the reaction to tomorrow's news that
breaks the cycle juxtaposition here, and I'd be more confidently
bearish on the setup were it not for the persistent willingness
of the daily cycle to trend in overbought territory over the past
month.  A move above 1135 will be confirmation that there's more
to the 30 minute upphase than initially suspected, while another
move below 1125 would abort this upphase and likely set up a test
of more important support at 1115-18.


150-tick ES


The short cycle oscillators had just rolled over as of 4:15PM,
and are pointing toward a retest of Keltner support 1127.75.  A
move below that level would threaten the current 30 min cycle
upphase.


Daily YM candles


YM closed unchanged at 10468, bouncing from the upper rising
trendline on the primary ascending channel.  Note that NQ has
broken this channel already, and the question is whether the
bearish oscillator divergence here portends a move to follow its
lead.


20 day 30 minute chart of the YM



I believe that the Fed's ongoing injections of open market
liquidity is distorting what would otherwise be a clearer picture
of the binary dollar trade in reverse.  The morning opened with
an extension yesterday's dollar up-everything down trade, and it
wasn't until the Fed added that last surprise 7-day repo to bring
the daily net to positive territory that bonds began to catch a
bid.  When bonds closed at 3PM, equities followed suit and
finished slightly in the green.  On a trading basis, we'll
continue to follow the oscillators of the charts we trade, but
for the moment, on an inter-market basis, I don't trust the
countertrend (on a daily cycle basis) moves in bonds and equities
today.  A break above resistance by equities could change that as
early as tomorrow, but unless and until that happens, I'm
inclined to follow the daily chart oscillators.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_012904_1.asp


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

Finicky Investors
- J. Brown

Yesterday the markets crater because the Fed removes its
"considerable period" language.  Today the markets rally after
the Fed releases its minutes from last month's meeting that
suggest they were considering a removal of this language back in
December.  No one ever said the stock markets moved on logic but
this time it might make sense.  The news yesterday was a great
"excuse" to take some profits off the table.  However, investor
sentiment turned bullish again as they realized that the Fed's
comments confirm that the economy really is improving and that
means strong corporate profits.

Tech stocks lagged the afternoon rally today but almost every
sector moved up off its lows.  Several sectors (transports, disk
drives, natural gas, and airlines) pulled back to their simple
50-dma and either held support there or bounced.

The hardware sector (GHA) did lose ground today but continues to
build what looks like a bullish flag consolidation pattern.  The
software sector (GSO) produced a nice "hammer" candlestick that
might suggest a one-day bullish reversal.  Probably the most
watched tech sector index is the SOX, which closed under its
simple 50-dma but remains above round-number support at 500.  If
I had to bet, I'd bet on a bounce here tomorrow unless some chip
company issues an earnings warning before the open.

Financials were strong today with the banking index (BKX) pulling
back to previous resistance before bouncing from the 980 level.
The strongest sector was the biotechs (BTK).  The BTK index added
2.35%.  I also note that the DRG drug index looks bullish with a
nice bounce from its short-term moving averages.  Normally when
the markets turn volatile drug stocks are commonly seen as "safe
havens" to park your money.

Utilities were also higher as investors seem reluctant to sell
these higher-yielding dividend stocks.  Two more sectors
performing well are insurance (IUX) and healthcare (HMO).  Both
have managed to maintain the majority of the gains with only a
slight pull back.

It is notable that the gold & silver index (XAU) was the worst
performer with a 2.32% drop and a close under recent support at
96. It was no coincidence that gold futures fell more than $16 to
close under the $400 level for the first time in weeks.


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

Market Averages

DJIA ($INDU)

52-week High: 10701
52-week Low :  7416
Current     : 10510

Moving Averages:
(Simple)

 10-dma: 10578
 50-dma: 10208
200-dma:  9458



S&P 500 ($SPX)

52-week High: 1155
52-week Low :  788
Current     : 1134

Moving Averages:
(Simple)

 10-dma: 1140
 50-dma: 1094
200-dma: 1017



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1496

Moving Averages:
(Simple)

 10-dma: 1530
 50-dma: 1457
200-dma: 1319



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

Try as they might the volatility indices could not maintain any
of their morning gains.  The midday reversal suggests the rally
might not be over yet for the markets.

CBOE Market Volatility Index (VIX) = 17.14 +0.36
CBOE Mkt Volatility old VIX  (VXO) = 17.11 +0.01
Nasdaq Volatility Index (VXN)      = 25.20 +0.04

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.80        960,543       764,294
Equity Only    0.64        836,300       538,960
OEX            1.22         24,106        29,386
QQQ            1.74         56,817        98,948


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.1    - 1     Bull Confirmed
NASDAQ-100    75.0    - 3     Bull Confirmed
Dow Indust.   90.0    - 3     Bull Confirmed
S&P 500       87.0    - 1     Bull Confirmed
S&P 100       87.0    - 1     Bull Confirmed


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

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


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

 5-dma: 1.01
10-dma: 0.92
21-dma: 0.95
55-dma: 1.03


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    1108      1085
Decliners    1752      2024

New Highs     166       113
New Lows       14         6

Up Volume    939M      793M
Down Vol.   1378M     1811M

Total Vol.  2369M     2611M
M = millions


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

Commitments Of Traders Report: 01/23/04

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                 Thursday 01-29-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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


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

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


CALLS:
*****

None


PUTS:
*****

None


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Brokerage Group, addressing the demand for personalized,
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within the same firm. Licensed Option Principals Andrew Aronson
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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.

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

Computer Sciences Corp - CSC - cls: 45.25 chng: +0.00 stop: 43.50

As we suspected on Tuesday, CSC needed to fall back to firm
support before the buyers would come back in and we got to see
just where that support was today.  Following another sharp drop
on Wednesday, the stock continued to drop this morning, coming
within striking distance of the 30-dma ($44.34) at its low before
rebounding sharply into the closing bell, making up roughly half
its intraday loss.  That leaves a big doji of indecision for us,
but it does confirm support in the $44.50-45.00 area, giving us
the reassurance that old resistance is going to be defended by
the bulls as new support.  Today's rebound off the lows looked
like a solid entry point and a continuation of the bounce
tomorrow looks viable for new entries.  Obviously the first key
level of resistance to deal with will now be found near last
week's highs just under $47 and traders looking to enter on
strength will need to wait for that breakout before playing.
Maintain stops at $43.50.

Picked on January 25th at    $46.54
Change since picked:          -1.29
Earnings Date               2/11/04 (confirmed)
Average Daily Volume =     1.22 mln
Chart =


---

Express Scripts - ESRX - cls: 69.49 chng: +0.15 stop: 65.00*new*

Investors in ESRX got a bit of excitement yesterday as the stock
finally pushed strongly through the $70 level before the broad
market weakness took the bloom off the rose.  The stock then
pulled back to end near its lows of the day, but the dip buyers
re-emerged today.  The dip under $69 seemed to be all the
pullback that would materialize and the buyers took advantage of
it, resulting in a small pop at the end of the day.  Note how the
10-dma ($68.67) has continued to act as intraday support and
barring a deeper pullback near the 20-dma ($66.86) that may be
the best we can do for an entry point.  Even though the daily
Stochastics are starting to weaken, they haven't yet given a sell
signal and it is seeming increasingly unlikely that we'll see a
pullback all the way to strong support at $66.  There should now
be strong support just under $68 and a rebound near there can
also be used for entry.  Note that we're still shying away from
momentum entries, as ESRX's trading pattern just doesn't make
such a strategy look viable.  Stops should rise slightly tonight
to $65, just under the 50-dma ($65.08).

Picked on January 13th at    $68.32
Change since picked:          +1.17
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =     1.22 mln
Chart =


---

Genzyme Corp. - GENZ - close: 55.66 change: +1.39 stop:
52.00*new*

It seems like GENZ is attached to the $55 level with rubber
bands, doesn't it?  Stretch price to the upside and the stock
snaps back to that price magnet.  And any attempt to drive the
stock lower meets with the same response -- a snap back to $55.
While it is encouraging to see the stock fail to sustain
yesterday's drop and bounce back over $55, the daily chart shows
just how volatile price action has been, snapping repeatedly back
and forth between resistance near $56 and support near $54.  This
volatile action is chewing up a lot of energy and so far it is
unclear in which direction it will be resolved.  But one thing we
can say with confidence is that chasing the stock higher on
apparent breakout moves is not a high-odds strategy.  Buying the
dips into the $53-54 support area is the best way to go right
now, with the understanding that the volatile oscillations of the
past 6 sessions are a sign of instability, increasing the risk of
being in the trade.  Because of that added risk, we're tightening
our stop tonight to $52, which will finally be below the 20-dma
($51.92) by tomorrow.

Picked on January 20th at    $53.00
Change since picked:          +2.66
Earnings Date               2/19/04 (unconfirmed)
Average Daily Volume =     2.83 mln
Chart =


---

Henry Schein - HSIC - close: 70.57 chg: +0.71 stop: 67.50

Traders might note that HSIC held up reasonably well during the
last few days of market volatility.  Today's bounce off the $69
level looks like another tempting entry point for new bullish
positions, especially with its close back over the $70 mark.  The
company also announced some good news with a new worldwide
distribution agreement with Pentron Laboratory Technologies.

Picked on January 22 at $70.65
Change since picked:    - 0.09
Earnings Date         03/04/04 (unconfirmed)
Average Daily Volume:      334 thousand
Chart =


---

MBIA Inc. - MBI - close: 62.73 chg: +0.56 stop: 59.99

It's almost time to move on in MBI.  The pull back to $61.00
never materialized but neither did a continuation of its
breakout.  If you like to see the glass as half full then MBI's
shown some decent relative strength lately with its sideways
consolidation.  Unfortunately, the company is set to announce
earnings on Tuesday February 3rd so we'll likely close the play
tomorrow.  No new entries are suggested.

Picked on January 20 at $62.93
Change since picked:    - 0.20
Earnings Date         02/03/04 (confirmed)
Average Daily Volume:      572 thousand
Chart =


---

Morgan Stanley - MWD - close: 57.84 chg: +0.78 stop: 56.75

Wow!  It doesn't get ANY closer than today.  MWD followed the XBD
broker-dealer index lower yesterday and shares of MWD dropped
right to its technical support at the 50-dma.  There was some
brief weakness midday today for both and MWD traded to $56.76,
one penny above our stop loss, before rebounding.  The stock is
now right above rising technical support and horizontal price
support at $56.75-57.00.  Traders might want to consider new
positions here but look for some momentum in our direction (like
a move over $58.00).  You probably heard some positive news for
MWD today and didn't know it.  All day long the media has been
talking about the American Express deal with MBNA to launch a new
Amex card.  This development was made possible by a September
17th court decision last year that said Visa/Mastercard could not
prevent its member banks from offering competing cards.  This
allows the huge Visa/MC network of banks to offer AXP cards as
well as MWD's Discover cards.  Visa & MC have appealed the
decision so there is a chance for it to be overturned but right
now it's a market positive for MWD.

Picked on January 15 at $59.81
Change since picked:    - 1.97
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million
Chart =



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

Danaher Corp - DHR - close: 89.98 cls: +0.58 stop: 87.99

Company Description:
Danaher, a leading industrial company, designs, manufactures, and
markets innovative products, services and technologies with
strong brand names and significant market positions. Driven by
strong core values and a foundation provided by the Danaher
Business System, Danaher's associates are pursuing a focused
strategy aimed at creating a premier global enterprise.
(source: company website)

Why We Like It:
Danaher, Danaher...hmm...probably not familiar with its name but
you might know Danaher for its Craftsman tool line it makes for
Sears.  The company announced earnings this morning and they were
better than expected.  Net income was $1.06 a share but after
backing out a one-time 9-cent gain its 97 cent results beat
estimates by 2 cents.  Revenues were up nearly 17% to $1.49
billion, also better than estimates.  We normally don't like to
play a stock this close to earnings, even after the report, but
shares offered a perfect bounce from the bottom of its rising
channel, technical support at its 50-dma and price support at
$88.00.

What could propel investors to buy the stock now that the
earnings news is out?  DHR plans to complete its acquisition of
two medical device companies in the first quarter (Radiometer and
Gendex) and the company raised its earnings guidance for the
first quarter.  DHR had previously guided Q1 earnings to 72-77
cents a share.  Analysts had them pegged at 78 cents.  Now DHR
believes its first quarter net income will be in the 76 to 81
cent range.  We do feel the need to mention that while this looks
like a relatively lower risk entry near support DHR's P&F chart
isn't offering the bulls much to go on.  Its bullish vertical
count of $87 has already been met and its P&F chart is showing a
bearish high-pole warning.

We want to protect ourselves and make sure we're catching DHR on
a bounce so we plan to use a TRIGGER at $91.01 to open the play.
Until DHR trades at or above this level we'll remain on the
sidelines.  Once activated we'll start the play with a stop loss
just below today's low at $87.99.  Our first target is $96 but if
the channel holds up DHR might be able to hit $100.

FYI: DHR's last split was in June of 1998.  Shares are well above
their previous split price so there is the possibility of DHR's
management announcing a split as it approaches $100.


Suggested Options:
Short-term traders can choose the February or March options and
longer-term players might want to look at June or Septembers.
Our preferred strikes would be the March calls with the March 90s
as our favorite.

BUY CALL FEB 90 DHR-BR OI=1110 at $2.55 SL=1.25
BUY CALL MAR 90*DHR-CR OI= 863 at $3.90 SL=2.00
BUY CALL MAR 95 DHR-CS OI= 802 at $1.75 SL=0.90

Annotated Chart:



Picked on January XX at $xx.xx <-- see TRIGGER
Change since picked:    + 0.00
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =



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

Adobe Systems - ADBE - close: 36.11 change: -0.53 stop: 39.50

ADBE finally cracked the $36 support level on Thursday and did so
on rising volume.  That's the first real confirmation of weakness
we've seen over the past couple weeks and it is truly
encouraging.  There was a slight bounce at the end of the day,
but not enough to prevent the stock from posting its lowest close
since mid-August.  Unfortunately, there's a problem.  ADBE came
out after the closing bell and raised its EPS guidance for Q1
(from $0.33-0.36 to $0.36-0.42) due to stronger than expected
revenues.  Of all the nerve!  That was enough to pop the stock as
high as $39.60 in the after hours session, before price settled
back to the $38 level.  So what now?  We'll have to wait and see
how it all plays out tomorrow.  Another failed bounce below the
20-pma ($38.09) can still be used for entry.  But if price plows
through the 50-dma ($39.19), then it's a safe bet that the jig is
up for this bearish play.  Maintain stops at $39.50.

Picked on January 11th at     $37.12
Change since picked:           -1.01
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.42 mln
Chart =


---

Kohls Corp - KSS - close: 43.40 change: +0.73 stop: 45.05

So far so good.  Shares of KSS followed through on its Tuesday
failed rally at $45 and broke its short-term up trend yesterday.
Unfortunately, the midday market rebound today also influenced
shares of KSS.  Keep your eyes open for another roll over
somewhere under $44.  In the news KSS announced it would help
launch a new clothing line from Daisy Fuentes, a fashion model
and TV personality.  This is probably good news for KSS but not
something that's going to alter its share price today.

Picked on January 27 at $44.05
Change since picked:    - 0.65
Earnings Date         02/26/04 (unconfirmed)
Average Daily Volume:      4.6 million
Chart =


---

National Semiconductor - NSM - cls: 36.91 chng: -0.27 stop: 39.00

So close!  It was impressive that the Semiconductor stocks held
up as well as they did over the past couple days, especially with
Technology shares continuing to be weak.  The SOX has broken
below $515 support, but has yet to take out more critical support
at the $500 level.  At the same time, our NSM play dipped to
within a few pennies of the $36 level before rebounding back near
$37 at the end of the day.  Recall that we need to wait for a
break of the December 16th low ($35.89) before taking a position,
as we've set an entry trigger at $35.85.  The way NSM and the SOX
are trading, it looks like a break under our trigger in NSM will
be accompanied by the SOX dropping under $500, giving us a nice
point of confirmation.  Wait for the break before playing and
then target a drop to initial support at $32.  Maintain a tight
stop at $39, because if NSM breaks back over that level, the odds
of a breakdown arriving will be significantly diminished.

Picked on January 27th at     $36.73
Change since picked:           +0.18
Earnings Date                3/04/04 (unconfirmed)
Average Daily Volume =      3.37 mln
Chart =


---

QLogic Corp. - QLGC - close: 44.48 change: +0.17 stop: 48.50

It wasn't the dramatic breakdown we were hoping for, but QLGC did
crack the $45 support level in the midst of yesterday's broad
market selloff, falling all the way to $44.  That level was
tested numerous times today and held as support right into the
closing bell.  Is the stock heading lower?  Looking at the daily
chart, we can now see that indeed the $44 level has been the site
of significant historical support and resistance in the past, so
it may be a bit tougher to crack than we had first expected.
That said, if the SOX continues to weaken, QLGC will likely
continue its weak price pattern, heading down to test next
support near $41-42.  In light of the $44 support, our preference
for new entries is on failed bounces below the $46-47 area.  The
10-dma ($46.10) looks like it should reinforce that resistance
and conservative traders may want to use a tighter stop on open
positions -- maybe at $47.50, just over Monday's intraday high.
We'll maintain our official stop at $48.50.

Picked on January 22nd at    $45.25
Change since picked:          -0.77
Earnings Date               4/14/04 (unconfirmed)
Average Daily Volume =     3.91 mln
Chart =



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

None


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**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

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Contact Support
The Option Investor Newsletter                 Thursday 01-29-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Heavy Metals
Traders Corner: Uncle Sam Is Getting A Little Too Friendly


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

Heavy Metals
___________________________________________________________________

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.
___________________________________________________________________


Freeport McMoran - FCX - close: 35.90 change: -1.27

WHAT TO WATCH:  Gold traded under the $400 level for the fist
time today in weeks.  We've been suggesting gold stocks in the
watch list or the radar screen as potential bearish candidates
for days.  FCX still looks like a bearish candidate but traders
might want to use a trigger under support at $35.00, especially
considering its late day bounce from its lows.  If FCX breaks $35
the next support level is its 200-dma nearing 31.50.  Aggressive
traders might want to consider a failed rally in the 37-38 range
as a potential entry point.

Chart=


---

Phelps Dodge - PD - close: 73.40 change: -0.75

WHAT TO WATCH:  PD is another metal stock to watch but its
primary product is copper.  The expanding economy and rising
commodity prices have driven PD to highs not seen in years.
Traders have been buying pull backs to its simple 50-dma for the
last several months and PD is getting close to another test of
this moving average.  Notable was PD's earnings report out this
morning.  The company beat estimates for net income and revenues,
which soared more than 30%.  Despite this news shares still fell
back.  Bulls can look for a bounce from the 50-dma, bears might
want to look for a breakdown under $70.00.

Chart=


---

Caterpillar - CAT - close: 77.26 change: -2.36

WHAT TO WATCH:  CAT is a Dow component that did not participate
in the midday bounce today.  The sell-off began three days ago
when CAT produced a big bearish engulfing candlestick.  We didn't
play it because the company was announcing earnings.  Earnings
were good and CAT beat by 3 cents and guided higher but still the
stock fell in a "sell the news" reaction.  Yesterday's candle
broke support at $80 and its 50-dma.  Today confirmed the
breakdown but now shares are short-term oversold.  Normally
previous resistance becomes new support so that means CAT should
have new support in the 74-75 region.  We'd look for a bounce
back to $80.  Then if shares begin to fail aggressive bears could
target entries with a stop above $80.

Chart=


---

Nextel Communications - NXTL - close: 26.17 change: +0.10

WHAT TO WATCH:  NXTL is certainly a stock to watch.  Shares have
drifted back to the bottom of its rising channel.  They may have
broken support at its 50-dma but NXTL still has support at
$25.00.  Some have rumored NXTL to be a possible bidder on AT&T
Wireless (AWE).  If NXTL does bid it may drive the stock lower.
Bullish traders might want to look for a rebound back above the
$27.00-27.50 region and target $30.00 or the top of the channel
in the low 30's.

Chart=


---

Illinois Tool Works - ITW - close: 77.55 change: -2.11

WHAT TO WATCH:  The breakdown in ITW is picking up steam.  Three
days ago it closed under its 50-dma.  Yesterday it broke support
at $80.  Today it fell to $77 before bouncing off its lows.
There is potential support in the $74-76 range but it may not
hold.  We'd look for a bounce and failed rally under the $80
level as a potential entry point for short-term bearish plays.

Chart=



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

MO $55.95 +0.30 - MO is building on its recent breakout above
resistance at $55.00.

MMM $79.52 -0.48 - The Dow may have bounced today but MMM did
not.  Shares went the opposite direction and broke support at
$80; definitely not a bullish development.


OXY $44.32 +0.00 - OXY looks very extended with hardly any pause
in its bullish run.  Now that run is looking tired.  A move under
today's low may be an aggressive entry for bearish positions.

TIF $39.68 -0.30 - Tiffany is back under the $40 level but
managed another bounce from support at $39.00.  We're expecting a
move to its 200-dma near 37.50.


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

Uncle Sam Is Getting A Little Too Friendly
By Mike Parnos, Investing With Attitude

Uncle Sam wants you!!  Actually, he doesn’t really want you – just
your money.  Why?  Not to feed the hungry or to house the
homeless, but to buy whitewalls for the next Mars explorer.  After
all, isn’t it more important to spend billions to explore Mars in
style?  Taxation, even WITH representation, isn’t all it’s cracked
up to be – especially when only half the “represented” people get
out and vote.

With tax season approaching, I thought it appropriate to devote a
little space to strategies on how to keep what we “represented”
folks spent blood, sweat, and tears to earn with our trading.  We
owe it to ourselves to try to get Uncle Sam’s hands out of our
pockets (we don’t really want to know him that well).  I contacted
the folks at TradersAccounting.com and they have provided me with
answers to some of the common tax questions I get from traders.
______________________________________________________________

Tax Questions & Answers
QUESTION:  I had trading losses over the $3,000 limit (obviously
not an accomplished CPTI student) for deductibility, is there
anything I can do?

ANSWER: One good thing is that the loss will carry forward for
twenty years. What you might be thinking of is filing as a trader.
As a trader, there is no limit to the deductibility of losses.
When you file as a trader, the year's net losses are "ordinary
losses" and are therefore not limited to the annual $3,000
"capital loss" limitation. Unfortunately, you would have had to
file during the previous tax year in order to qualify as a trader
for this year. Also, qualifying as a trader is a difficult
proposition for the majority of all traders.
You might be better served by setting up a legal entity for your
trading capital.

QUESTION: Is it OK to deduct all my educational expenses?

ANSWER: If you qualify as a trader or are using a legal entity,
YES! Here is the bottom line on deductible expenses: Just about
any expense that helps your business is tax-deductible as long as
it is ordinary, necessary and reasonable.
These expenses can include but are in no way limited to:
a) seminars and education
b) subscriptions to financial magazines and newspapers
c) trader guides and books
d) dedicated telephone usage and long distance
e) cell phone, pager and messenger fees
f) cable fees
g) on-line services
h) real-time quotes, charting and analysis
i) club memberships, dues and fees
j) stock tip services & newsletters and news service fees
k) office supplies, postage, bank charges and wire fees
l) travel and automobile expense
m) home office expenses
n) maid service and cleaning
o) restaurant meals had with fellow daytraders
p) interest paid on loans for the purchase of the trader's
positions (such "margin interest" is generally fully deductible
because it is not subject to the regular "investment interest"
limitation on IRS form 4952)

QUESTION:  How does the "wash sale" rule affect my covered call
stock option?   I wrote a covered call on Philip Morris that I
expect will result in the stock being called away since the stock
price is in the money. When that happens it will generate a
capital loss for me. I plan to buy the stock back as it is at a
much lower price and moving up. To be able to take the capital
loss and be able to re-buy the stock must I wait 30 days because
of the wash sale rule?

ANSWER: Yes, you need to observe the 30-day rule in order to take
the loss. As the book says, " A loss sustained upon a sale or
other disposition of stock or securities is not allowed if, within
a period beginning 30 days before the date of the sale or
disposition and ending 30 days after that date, the taxpayer has
acquired, or has entered into a contract or option to acquire,
substantially identical stock or securities." Reference: code
section 1091.

QUESTION:  How are 1256 contracts taxed?

ANSWER: While capital gains seem to be taxed differently (and in
the case of futures and long term holdings they are), they all add
to the total of your income. To figure out your income tax rate
you would use the total of all income received during the year,
including your trading.

QUESTION: What is the rule for long-term capital gain rates and
the trader?

ANSWER: Long-term capital gains occur when you own a position for
longer than 12 months and one day and sell it for a gain. This is
considered a long-term capital gain and is taxed at a tax rate of
10% at the low end to 20% at the high end.  If you trade 1256
contracts, (commodities & futures) all gain or loss is treated as
60% long term and 40% short-term capital gains and losses.
If you trade options on "cash settled indexes" they too are taxed
the same as 1256 contracts. This type of trading is certainly
advantageous to the typical trader who may be trading in indexes
but does not know of this benefit.

QUESTION: Does trading the options on the QQQ, DIA or SPY get 1256
tax treatment similar to cash settled index options?

ANSWER: Yes, the options on the QQQs and the other exchange-traded
options of index stocks are subject to the provisions of IRS Code
Section 1256. On the other hand, if you are just trading the QQQ
tracking stock, you would report the transactions on your Schedule
D as you would regular stocks.

This answer may surprise a few of you. Unfortunately, there is an
old article floating around the internet that offers conflicting
opinions. The information we are sharing comes from a recent
internal ruling by the IRS.

The QQQ, SPX, XOI, etc - are types of non-equity options. Non-
equity options are options that are not directly or indirectly
related to a specific equity (stock). Most if not all publicly
traded index options are non-equity options and get the 1256 tax
treatment.
section 1256 says that any gains or losses from the sale of these
securities are subject to the 60/40 rule. 60% of gains and losses
are long-term and 40% are short-term, regardless of how long the
securities are held.   So, even if you only hold the option for a
day, 60% of your gain will be considered long-term and taxed at
the preferential long-term capital gains rate.

Non-equity options are usually reported on Form 6781, unless they
are used as a hedge. A hedge would be buying, for example, the
QQQ, and then selling call options against them.
______________________________________________________________

Confirm, Confirm, Confirm . . .
The above answers were provided by TradersAcounting.com.  CAUTION:
It’s important that you consult your own tax preparer to confirm
the above information.  If you (or your tax preparer) have more
specific questions, visit the TradersAccounting website and
contact them.  In upcoming columns I will provide additional
questions and answers to tax question relevant to traders.
______________________________________________________________

FEBRUARY CPTI POSITIONS

Position #1 -- OEX – Credit Spread Boogie – 563.10
With the market trending, let's not fight the tape.  We're going
to establish a bull put spread, take in some premium, and ride the
wave into shore.
We sold 3 OEX February 565 puts, and bought 3 OEX February 540
puts for a total credit of $6.80 (x 3 contracts = $2,040).
This strategy requires $25 x 3 contracts = $7,500.  We're only
trading three contracts because, if the market reverses
significantly, it might become necessary to close the bull put
spread and establish a bear call spread that may be wider and
would require more contracts.  We need to preserve our money for a
potential maintenance requirement.

Position #2 – MNX (mini NDX index) – Iron Condor – 149.64
This index seems substantially safer than the highly volatile NDX.
We're going to put on an Iron Condor with limited exposure.
Because the market is trending, we skewed the strike prices
slightly so that we have a little more cushion on the upside.
We sold 10 MNX February 165 calls and bought 10 MNX February 170
calls for a net credit of $.40 x 10 contracts = $400.  Then we
sold 20 MNX February 150 puts and bought 20 MNX February 147.50
puts for a net credit of $.50 x 20 contracts = $1,000.  Our total
credit of $1,400.  Our maximum profit range is 150 to 165.  Our
exposure is only $3,600 ($5,000 less $1,400).  Maximum profit:
$1,400.

Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $94.05
The XAU has been temperamental of late.  This is a low risk and
relatively safe play with a wide range.  Maybe we can make a
couple of bucks.
We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts
for a net credit of about $.70 (x 10 contracts = $700).  Then we
sold 10 XAU February 110 calls and bought 10 XAU February 115
calls for a net credit of about $.45 (x 10 contracts = $450).  Our
maximum profit range is $90 to $110 – a 20-point range.  Our
exposure is $3,850 ($5,000 less $1,150).  Maximum profit: $1,150.

Position #4 – OSX (Oil Service Sector Index) - $101.89
We're being cautious again here.  We're reducing our potential
income by expanding our safety range.
We sold 10 OSX February 105 calls and bought 10 OSX February 110
calls for a net credit of about $.45.  Then we sold 10 OSX
February 90 puts and bought 10 OSX February 85 puts for a net
credit of about $.75.  Our total net credit of about $1.20 (x 10 =
$1,200).  Our maximum profit range is 90 to 105 – a 15-point
range.  Our exposure is $3,800 ($5,000 less $1,200).  Maximum
profit: $1,200.
_____________________________________________________________

ONGOING POSITION
QQQ ITM Strangle – Ongoing Long Term -- $37.24
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We're
going to make money by selling near term puts and calls every
month.  Here's what we've done so far:
October: Oct. $33 puts and Oct. $34 calls – credit of $1,900.
November: Nov. $34 puts and calls – credit of $1,150.
December: Dec. $34 puts and calls – credit of $1,500.
January: Jan. $34 puts and calls – credit of $850.
February: Feb. $34 calls and $36 puts – credit of $750.
Total credit: $6,150.

Note:  We haven't included any of the proceeds from this long term
QQQ ITM Strangle in our profit calculations.  It's a bonus!  And
it's a great cash flow generating strategy.
___________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner."  They're waiting for you
24/7.
____________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.

Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.


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