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Daily Newsletter, Tuesday, 02/03/2004

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The Option Investor Newsletter                 Tuesday 02-03-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Hope Minus Worry Equals Stagnation
Futures Markets: Running the Clock
Index Trader Wrap: Cisco deflates in after-hours
Market Sentiment: Mixed Markets


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
     02-03-2004            High     Low     Volume Advance/Decline
DJIA    10505.18 +  6.00 10528.96 10457.11 1.82 bln   1414/1427
NASDAQ   2066.21 +  3.06  2071.44  2057.33 1.83 bln   1404/1635
S&P 100   563.36 +  0.60   563.69   560.89   Totals   2818/3062
S&P 500  1136.03 +  0.77  1137.44  1131.33
RUS 2000  579.15 -  1.39   581.19   578.29
DJ TRANS 2851.39 - 16.63  2880.30  2851.03
VIX        17.34 +  0.23    17.78    17.17
VXO        17.06 +  0.19    17.72    16.92
VXN        26.30 +  0.49    26.31    25.66
Total Volume 4,033M
Total UpVol  1,644M
Total DnVol  2,249M
52wk Highs     442
52wk Lows       13
TRIN          1.34
PUT/CALL      0.70
************************************************************

Hope Minus Worry Equals Stagnation

Traders today could easily identify the hopes and worries that
affected markets, but had more difficulty predicting which would
most fan market behavior.  By the end of the day, the two
revealed themselves to be equally matched, with markets
stagnating near Monday's closing levels in a boring session that
seemed to go on and on and on.

The Dow closed up 6 points, the Nasdaq 3.06, and the SPX 0.77.
Adv:dec ratios stood at 17:16 for the NYSE-traded issues and
15:17 for the Nasdaq-traded issues, with down volume ahead of up
volume on both indices.  A high TRIN persisted all day,
indicating selling pressure, but there was no follow-through on
that pressure except in specific sectors.  Advancing sectors
included the SOX, gaining 0.49 percent; the Natural Gas Index,
gaining 0.51 percent; the Utility Index; gaining 0.57 percent;
the Pharmaceutical Index, gaining 0.70 percent; and the Dow Jones
Home Construction Index, climbing 1.57 percent. Declining sectors
included the Oil Service Sector Index, falling 1.20 percent; the
Morgan Stanley Healthcare Index, falling 1.99 percent; and the
Airline Index, declining a steeper 2.92 percent. Autos fell as
January sales reports trickled in.  Ford (F) reported a 5 percent
decline in sales from year-ago level, with the decline in line
with expectations, according to some. GM reported that January
sales fell 2 percent, with expectations having been for an
increase in sales.  Ford fell 1.65 percent on strong volume and
GM declined 1.72 percent on almost double average daily volume.

Where prompted the hope today?  Hope arose from the CSCO earnings
due after the bell, with that hope fanned by some CSCO suppliers
and competitors having reported good news during this earning
season.  With memories of other post-CSCO-earnings rallies, those
hopes burned bright.  After the bell, CSCO reported Q2 net sales
of $5.4 billion against expectations of $5.2-5.3, depending on
the source.  Headlines announce that the company expects Q3 sales
of $5.45-5.56 billion.  CSCO reported Q2 earnings per share of
$0.18 GAAP, with expectations being for $0.17.  As Jonathan
Levinson pointed out on the Market Monitor after hours, however,
that $0.18 was before an accounting charge.  CNBC trumpeted CEO
John Chamber's statement that it was "clear that the global
economy is improving."  However, CNBC commentators also mentioned
FDRY's pummeling the day after it reported in-line expectations,
with FDRY considered a lesser competitor of CSCO's.  At the time
of this writing, CSCO traded at $25.17, down $1.24 from the 4:00
close, but be careful of trusting what you see in after-hours
trading periods.  Analysts will be paying particular attention to
margins, for example, and tomorrow morning should see a slew of
statements, either negative or positive, from those analysts.
Cramer was already characterizing Chambers' statements as more
cautious than Juniper's CEO's, and if that attitude carries
through to other market watchers, CSCO may indeed trade lower.

Tuesday's worries proved equally easy to identify.  Concerns
about the budget-deficit, the dollar's weakness ahead of this
week's G7 meeting in Florida, the discovery of a ricin-laced
envelope in a U.S. Senate office, the timing of rate hikes and
their likely impact on interest-rate-sensitive sectors, and
sector downgrades all worked to dampen those brightly burning
hopes.  Bear Stearns downgraded the U.S. machinery sector due to
the specter of higher interest rates and the reality of a
slowdown in new orders in January, with Caterpillar (CAT) and
Honeywell (HON) declining 0.58 percent and 1.33 percent,
respectively. Goldman Sachs downgraded the semiconductor sector
to a neutral rating from its previous attractive rating, and also
downgraded some semiconductor companies on valuation concerns.
Among Applied Materials (AMAT), KLA-Tencor (KLAC) and Novellus
Systems (NVLS), all subjects of the GS downgrade, only NVLS ended
lower on the day, however, as the SOX recouped some of its recent
losses.

Other worries cropped up during the day.  The Fed's Bank of
Chicago President Michael Moskow spoke before a Chamber of
Commerce in South Bend, Indiana, reportedly saying that U.S.
economic slack might continue for some time and that the job
market remained a key area of weakness. At 10:00, the release of
the Challenger report revealed that U.S. layoff announcements
were up 26 percent in January.  Challenger says that January
always sees layoffs accelerate, a point Jim Brown has made in his
commentaries, too, but this doesn't engender much faith in a
stronger jobs number on Friday.  Weakness in SOHU, a Chinese
Internet-related stock, after its earnings report may have hit
AMZN, too, dropping the company's stock more than 3 percent and
the INX, the CBOE Internet Index, 1.60 percent.

The worries couldn't entirely dampen the CSCO-inflamed hopes,
though.  The day might have been much different without those
hopes. During the overnight session, the Nikkei set the tone for
a negative open with an early heart-stopping plunge almost 300
points from the day's high.  Plummeting from 10,800 toward 10,500
support in early trading, the Nikkei managed to claw its way back
to a 10,641.92 close, but still closed lower by 134.81 points or
1.25 percent. Various forces led to that decline, including
worries over the dollar's further slippage against the yen,
reports of new deaths due to avian flu, and the typical February
pattern that sees Japanese banks sell some of their stock
holdings.  News of the ricin-laced envelope found in a U.S.
Senate office began to circulate during that overnight session,
too.

European markets also helped set the stage for a lower open, with
the FTSE 100 down 0.18 percent, the CAC 40 down 0.83 percent, and
the DAX down 0.95 percent as the U.S. markets opened.  When our
markets steadied, so did European markets.  All erased some of
those early losses, but only the FTSE closed in positive
territory.  Not being a tech-heavy or export-reliant index, the
FTSE 100 outperformed the others in afternoon trade, climbing off
its midday low and closing up 9.20 points or 0.21 percent, but
just under 4400 resistance.  The CAC 40 saw a late-day climb that
erased some of its losses, but it still closed down 0.73 percent
and below the day's two resistance levels at 3640 and 3660.  The
DAX closed down 0.35 percent, but also closed below the day's
resistance, at 4060.

Before the bell-earnings included reports from Colgate-Palmolive
(CL), Spring FON (FON) and Sprint PCS (PCS), with each beating
expectations by 2 cents, according to one report, but those
reports didn't do much to prop up the markets.  CL closed higher
by 3 percent, FON dropped 0.28 percent, and PCS dropped 1.33
percent, each moving on big volume.

That's what happened today.  What's likely to happen tomorrow and
the rest of the week?  If GM and CSCO after-hours trading can be
trusted, we could see a down day tomorrow, with both trading
lower as this report was prepared.  GM announced this afternoon
that it had received a Wells notice from the SEC, with its CEO
and CFO reportedly now expected to face civil charges due to
possible problems with sales practices and disclosures.  However,
not putting much faith in what I see after-hours, I think it
remains possible that many indices may remain in a holding
pattern ahead of Friday's unemployment and nonfarm payrolls
numbers.  Let's take a look at several charts to see what would
have to occur to change that holding pattern.  Jeff Bailey will
be covering the indices in more detail in his report, so this
will be an overview only, and one that's complicated by the fact
that my charting service was not delivering daily charts as this
report was prepared.  I've switched to 720-minute ones, but the
charting service balked at following those back past October,
too.  I've removed the moving averages, as they're erroneous.

The Dow rises off last week's low in a pattern that resembles a
bear-flag climb, with that bear-flag climb possibly forming the
right shoulder of a H&S formation.  Even if that formation is
valid and is eventually confirmed, the completion of the pattern
might require a day or two for prices to round over into that
right shoulder.

Annotated Daily Chart for the Dow:



Note the confluence of the H&S neckline and top-line support from
the Dow's former regression channel, however.  Bears will need to
exert strong downward pressure to break through that converging
support.  RSI and stochastics already reveal a propensity to turn
up and the MACD histogram has stopped declining.  This remains a
bearish formation of a type that was once considered reliable,
but lingering bullish fervor could keep this one from confirming,
just as that bullishness has kept others from confirming in
recent months and weeks.

However, take a look at the TRAN, the Dow's sister index.  Was
that a H&S that fell to its target straight from the head without
ever forming a right shoulder?

Annotated Daily Chart for the TRAN:




The TRAN sometimes leads the Dow, so that the Dow's possible H&S
should perhaps be given some credence this time.  Before bears
start salivating, however, the Dow's failure so far to confirm
the TRAN's plummet with a plummet of its own could be seen by
some as bullish divergence between the sister indices.  If the
Dow continues to hold up for another week or so, relief may send
the Dow higher again as the H&S formation is rejected.

Much may depend on the reaction to CSCO's earnings tomorrow.  In
Japan last night, some credited a negative outlook on Olympus
with a snowball effect, sending all tech-related stocks lower,
and the Dow does also include some tech stocks.  In addition,
many tech-related indices perch precariously on the respective
regression-channel support.  Recent declines have been ugly, but
they're always ugly as the tech-related indices have fallen to
the bottom of their respective regression channels, and somehow
the bounce always occurs.

Annotated Daily Chart for the NDX:



Since the NDX has always bounced from the bottom of this channel,
the presumption remains that it will this time, too.  However,
I'm watching for a fall beneath last week's NDX low of 1474.13 to
signal that the NDX may be beginning to break out of its
regression channel.  As is evident from the minimal data the
charting service reveals tonight, the NDX does sometimes violate
that channel before climbing again.  Support lies at 1460 and
again, stronger, at 1450, so unless momentum gets the NDX moving
to the downside, tech bulls will soon gain confidence and bid
this up again.

It's been a while since I last wrote a wrap.  I had planned to
include a weekly OEX chart from that wrap complete with the
original annotations, but the snafu in my charting service
doesn't allow me to do that.  Those original annotations had
included the comment that if the OEX could climb above 523.50, it
would see no real resistance again until 550.  I'd commented that
at the time, I wasn't seeing anything particularly bearish in the
OEX action, in that it had climbed above 487, consolidated, and
then begun another move higher.  I still am not looking for a
market collapse, but I do worry about the speed at which the SPX
and OEX zoomed higher in December.  Those gains need to be
consolidated and new support confirmed before traders feel
confident of buying into the market.  A prolonged period of
consolidation can perform this function, but so can a pullback.
The TRAN has shown us what can happen to the downside, and
December's climb has shown us what happens when bearish hopes are
dashed and bulls gain the power.  Trade carefully, using stops
appropriate for your account management practices.  Expect to be
whipsawed out of some trades.

Tomorrow morning sees the release of December's factory orders
and January's ISM services number, with both released at 10:00.
Because the GDP number has already given us a glimpse of factory
orders, the number doesn't usually prove to be a market-moving
number.  Expectations are for a gain of 0.3 percent, although
estimates range all the way up to a 1.5 percent gain.  Factory
orders were down 1.4 percent in November.  January's ISM services
or non-manufacturing number is estimated at 60 percent, although
estimates range down to 59 percent, with any number over 50
representing an expansion.  December's number was 58 percent.
Reaction to CSCO earnings and jitters over the upcoming G7
meeting and Friday's employment numbers will probably outweigh
any reaction seen due to these numbers, however.

Linda Piazza


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

Running the Clock
Jonathan Levinson

The US Dollar Index got slammed overnight, drifting higher today.
Treasuries moved strongly higher, metals and the CRB advanced,
and equities drifted without direction, closing mostly unchanged
in positive territory at the cash close and then fell in the last
15 minutes of trading.

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 selling that began at yesterday's cash close accelerated
throughout the night and bottomed over 1% below yesterday's high,
reaching 86.50 in the early morning.  A meandering bounce brought
the index to the 86.80 level, where it was trading as of this
writing.  Metals were firm throughout the session, and the CRB
added .89 to close at 261.85, led by strength in cocoa, copper,
platinum and natural gas futures.


Daily chart of April gold


April gold put in a higher high and higher low from yesterday,
holding above 399 and reaching as high as 405.  Chicago Fed
President Moskow made some comments about the low risk of
inflation, which coincided with the noontime selling that trimmed
some of the morning gains in gold and silver.  Nonetheless,
today's action was what bulls trading the upturn in the 10-day
stochastic wanted to see.  Trendline support remains 395 (tested
yesterday), with price confluence and Fibonacci support next at
392.  Gold closed higher by 1.20 at 400.40, March silver +.042 to
6.09, XAU -.12 to 95.93 and HUI +.99 to 216.57.


Daily chart of the ten year note yield


Ten year notes moved higher today despite the fed's allowing
3.25B in overnight repos to expire unrefunded.  Ten year note
yields (TNX) dropped 5.1 bps to close at 4.1%, a 1.23% decline
for the day.  The closing print is Fibonacci support, below which
4.065% is the next support area.  The daily cycle upphase is
still in progress but is hesitating, and the twin upside doji
spikes last week may have been the top of the cycle.  We won't
know until the next sell signal, and it hasn't printed yet.


Daily NQ candles


The NQ went net nowhere today, closing near the middle of a
narrowing range.  A lower high at 1499 and slightly higher low
(by half a point) at 1483 printed, but most of the trades
occurred in a small range than that.  Clearly, energy or "cause",
to use Tom O'Brien's pet term, is building for the next move, and
it's either going to be an upside break or a bear wedge
distribution breakdown.  The daily cycle downphase continues, but
it's now 4 days that have been spent going nowhere in either a
distribution or accumulation.  The Macd histogram on this
timeframe is suggesting the beginning of a pull higher, and on
the daily chart, either a bounce or a secondary drop is easily
imaginable from here.  Support is 1480, resistance 1500, followed
by 1510.  NQ closed lower by .17% at 1486.50.


30 minute 20 day chart of the NQ


The NQ behaved today as any symbol that finds itself in a coiling
wedge or pennant, frustrating both traders and their indicator as
the price attempts to squeeze into the apex.  1496 resistance was
broken only briefly and held on a closing basis.  An upside break
tomorrow will target 1510, but more importantly the 1515-20
confluence area that now coincides with upper wedge resistance.
To the downside, first support is at 1475, followed by 1460 and
1440.  On a cycle basis, the pennant has compressed the
oscillators and rendered them mostly useless, and I suggest
watching for a break of upper or lower resistance before choosing
a direction.


Daily ES candles


ES dropped 1.50 to finish at 1433, leaving a doji star verging on
a bullish hammer.  It was enough to give ES bulls a little uptick
in the ongoing daily cycle downphase, and squeezed shorts at the
top of the recent flag's range (see 30 minute chart below).  As
on the NQ, it's either going to break higher or lower, with
resistance at 1442, then 1449, support at 1130, 1126, 1122 and
1115-1118.  Is the 1122 area going to serve as a head and
shoulders neckline, or is the "smart" money enticing shorts into
bearish positions to provide fuel for the next squeeze higher?
We won't know until either support or resistance breaks.  The
daily cycle downphase is still intact, and the downtrend off the
high still hasn't been broken.  One strong buy program could
change that, and everyone knows it.


20 day 30 minute chart of the ES


The pennant was even more extreme on ES.  I've guestimated the
downtrend resistance line, but you get the rough idea.  1136,
1142-3, 1149 are upside resistance.  The 30 minute upphase got
even less traction than the preceding downphase did this morning,
so anything can happen from here.  I believe that the break out
of the apex will be directional and should provide more than a 10
minute move for traders to chew on.  Patience is a virtue unless
you have a strong feeling about which way it's going break.


150-tick ES


This intraday chart says it all.  There wasn't enough strength to
even give us a touch of the outer Keltner bands in either
direction.


Daily YM candles


YM lost 15 points, closing at 10473.  Three's nothing to add,
with the YM closing right on the upper primary channel trendline.


20 day 30 minute chart of the YM


An interesting thing happened today:  the dollar tanked
overnight, driving up metals.  It recovered during the day,
trimming some of their gains.  Despite the USD Index' being lower
by nearly a percent as of the cash close today, equities were
unchanged and treasuries were higher.  The Fed drained a
significant amount, but everything rose.  I wondered in the
Futures Monitor whether this was the Bank of Japan intervening
again, and it might well have been, as the anticipated effects of
the repo drain and dollar rise were notably absent.

For trading purposes, this is a question to leave open.
Pricewise, the current range is going to break anytime, and short
of using a strangle or other hedging technique, directional
traders are either scalping the narrowing range or waiting for a
break to follow.  I'm looking forward to tomorrow bringing us our
break.


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

Cisco deflates in after-hours

Shares of technology bellwether Cisco Systems (NASDAQ:CSCO)
$26.41 +0.80% fell to $25.28, or 4.2% in after-hours trade
despite the company reporting quarterly earnings that beat Wall
Street's estimates by a penny.

In what had been a tightly traded range for the NASDAQ-100
Tracking Stock (AMEX:QQQ) $36.93 -0.10% in today's session, the
Tracker fell to $36.72, or -0.56%.

Cisco (CSCO) reported second-quarter EPS of $0.18 (excluding an
$0.08 per share accounting charge), on revenues that rose 14.5%
year-over-year to $5.4 billion, which was above consensus
estimates for revenues of $5.28 billion.  On the company's
conference call, CSCO's Q3 guidance was for revenues to be up 1%-
3% quarter over quarter and 18-20% year-over-year, which for
yearly revenues would equate to approximately $5.452-$5.560
billion, which was above consensus of $5.368 billion.  What
appeared to disappoint investors in after-hours trade was CSCO
saying gross margins were seen between 67-69%, where overall
margins were seeing some negative impact from its wireless
LINKSYS business (contributed $165 million in revenue, which was
a 39% sequential increase), where competition remained fierce.
Gross margins for the recently completed quarter were 68.5%
compared with 68.7% during the prior quarter.

Chief Executive John Chambers said during a conference call that
for the second straight quarter he is more optimistic regarding
business conditions than he was three months prior.  Still, Mr.
Chambers cautioned investors that some business leaders remain
"surprisingly cautious" toward capital spending and hiring.

Earlier today, outplacement firm Challenger, Gray & Christmas
said announcements, or planned layoff announcements by U.S.
corporations jumped 26% in January (compared to December) to
117,556, the highest since October.  John Challenger, CEO of the
company said, "We typically see higher job cuts in January as
companies set into motion business plans an employment needs for
the year."

January's layoffs were 11% lower than January 2003's 132,222 and
53% lower than January 2002's 248,475, but continued to suggest a
slow pace of recovery for the U.S. labor markets.

It should be noted that the Challenger report only addresses
announced layoffs and other job reductions, not hirings.

Sectors seeing the largest number of announced layoffs were
consumer product companies (22,775), financial services (15,157),
and retail (14,016).

Market Snapshot / Internals - 02/03/04 Close



The major indices saw a rather flat trade during today's regular
session, where NASDAQ's A/D breadth was negative throughout.
NASDAQ A/D breadth has shown negative closing results for 5 of
its last 6 sessions and suggests bulls have been less aggressive
with their buying of 4 and 5-lettered stocks.  While the NYSE
finished with positive A/D breadth, its last 6 sessions of trade
have finished with positive breadth 3 times, where positive
breadth has been just about equal to today's.

The number of new highs at both the NYSE and NASDAQ are about
half those number seen just a week ago when the NYSE was steadily
above the 400 number of new 52-week highs, while NASDAQ averaging
roughly 300.  Both the NYSE and NASDAQ show their 5-day average
NH/NL ratios below their 10-day, which depicts a near-term lack
of bullish leadership.  Current 5-day/10-day comparison at the
NYSE is 97.4%/98.4%, while NASDAQ's 5-day/10/day comparison is
94.5%/96.4%.

Pivot Analysis Matrix



A tight range of trade was seen for the major indices with the
S&P 100 Index (OEX.X) 563.36 +0.10% high of the day marked by its
WEEKLY Pivot.  While the QQQ does see a lower trade in this
evening's after-hours, I will still note correlative resistance
beginning to look formidable at the $37.50 level, where
tomorrow's DAILY R2 and WEEKLY Pivot are highly correlative, and
MONTHLY Pivot of $37.43 is also quite close.  This may be a level
where QQQ bears define a near-term level of resistance, and where
QQQ bulls begin to see a short-term trading target if considering
any near-term bullish trades.

Traders should keep in mind that on Friday, January nonfarm
payrolls are scheduled to be released before the opening bell,
where this data will be of great focus by market participants.
Current economists' forecast is for the economy to have added
165,000 jobs after December's disappointing 1,000 addition.

As I update the pivot matrix this evening, I'm noting that
today's 09:05-03:00 U.S. Dollar Index (dx00y) 86.85 -0.77% trade
had the day's low of 86.61 coming at our MONTHLY Pivot.  A time
check shows this low came at 10:23 AM EST.

This may be an important observation for gold equity traders as
the intra-day high on the AMEX Gold Bugs Index ($HUI.X) 216.57
+0.45% was 219.72, which came at 10:25 AM EST.

With the U.S. deficit getting great attention as well as reports
of ricin being found at a U.S. Senate Office, I would have
thought gold equities, and gold itself, would have found a much
stronger bid in today's trade.  Gold has been trying to firm
around the $400/oz. level in recent sessions where this support
may be correlative with the WEEKLY Pivot in the U.S. Dollar Index
(dx00y) 87.06.

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



The OEX found its daily range marked by the MONTHLY Pivot as
support and WEEKLY Pivot as resistance.  Stochastics have turned
higher from "oversold" as the OEX show three sessions of higher
lows, while still within a relatively tight range of 560-567.

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



I've noted where the e-mini S&P 500 futures (es04h) are currently
trading after things appear to be settling down after Cisco's
(CSCO) earnings.  MACD still advising near-term caution to bulls,
while Stochastics recover from "oversold."  I would currently
take a break back below 1,122.38 for the SPX to show a lower low
after its recent 52-week high.

Dow Industrials Chart (INDU) - Daily Intervals



I'm making note of today's downgrade of Caterpillar (CAT) $77.04
-0.58%, which is one of the heavier weighted Dow components,
which has been a real drag on the Dow of late.  I'm thinking Bear
Stearns' downgrade follow some selling by their clients ahead of
the actual downgrade.  Bear Stearns says their research shows
that the heavy equipment and machinery stocks peaked two months
ahead of interest rate spikes that took place in 1994 and
believes CAT is fairly valued.

Intel (NASDAQ:INTC) $31.40 +3.56%, which doesn't carry nearly the
weight of CAT as it relates to the INDU looks to have started to
bounce after its recent declines from $34.50, which started on
01/09/04.

Keep an eye on CAT as a 3.5% bounce would have much greater
impact on the INDU than that of INTC.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals



Today's volume in the QQQ was light and most likely had traders
cautious ahead of Cisco's (CSCO) earnings.  I would have to think
there would be major support found at or just above the $36.00
level, which was a major level of resistance this past fall, when
broken to the upside, the QQQ rallied to a high of $39.00.

It has been light volume declines in the QQQ that has found some
impressive "oversold" bounces, and I'll update volume patterns in
the QQQ tomorrow.

Jeff Bailey


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

Mixed Markets
- J. Brown

The major averages ended mildly in the green on Tuesday but once
again the closing numbers don't tell the whole story.   Trading
was mixed with the major sector indices split down the middle
between winners and losers.  Out performing today were the
homebuilders as bond yields slipped lower.  Drug stocks were also
a winning sector, which may be a clue to investor sentiment since
drugs are typically seen as safe haven stocks.

Airlines continued to under perform as the XAL index dropped
another 2.9%.  News of more deaths in Asia from the avian flu
virus is making investors cautious and the markets didn't react
well to a $325 million debt offering by Delta.  Internet stocks
under performed as Amazon.com plunged another 6.9% toward its
200-dma, marking its fifth decline in six days.  Healthcare
stocks and oil services equities also felt the pinch.

The market internals clearly expressed the markets indecision.
On the NYSE advancers tied decliners 14 to 14.  On the NASDAQ
losing stocks edged past winners 8 to 7.  Down volume was
stronger than up volume by 10 to 7 on both exchanges.

Whether you have a bullish bias or a bearish one the fact that
stocks failed to sell-off on the ricin news belies the markets
underlying strength.  If you missed the headlines a powdery
substance coming from an envelope(s) in the offices of Senate
Majority Leader Bill Frist was confirmed as the deadly ricin
poison.  It may not be market moving news but it does affect
investor psychology.

In the financial world the big event tonight was CSCO's earnings
report that came out after the closing bell.  The networking
company beat net income estimates and revenue estimates but sold
off in after hours trading.  If investors choose to accept John
Chambers' positive comments at face value then we could see a
bounce in tech stocks tomorrow.

Tomorrow will also bring more economic data.  The ISM services
index is due and economists are looking for a bump from 58 in
December to 60 in January.  We'll also see the Factory orders
report where economists are looking for a +0.2% rise in December
following November's 1.4% drop.  There will also be an increased
focus on Friday's non-farm payrolls report and conjecture about
what might result from this Friday's G7 summit.



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

Market Averages

DJIA ($INDU)

52-week High: 10701
52-week Low :  7416
Current     : 10505

Moving Averages:
(Simple)

 10-dma: 10559
 50-dma: 10257
200-dma:  9490



S&P 500 ($SPX)

52-week High: 1155
52-week Low :  788
Current     : 1136

Moving Averages:
(Simple)

 10-dma: 1139
 50-dma: 1099
200-dma: 1021



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1491

Moving Averages:
(Simple)

 10-dma: 1514
 50-dma: 1464
200-dma: 1326



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

Volatility indices have been able to maintain their recent gains
but we haven't seen any major breakouts that might indicate a
change in investor mentality.

CBOE Market Volatility Index (VIX) = 17.34 +0.23
CBOE Mkt Volatility old VIX  (VXO) = 17.06 +0.19
Nasdaq Volatility Index (VXN)      = 26.30 +0.49

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.70        730,466       408,402
Equity Only    0.58        655,186       379,015
OEX            1.49         11,413        17,032
QQQ            2.95         21,347        63,044


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

Bullish Percent Data

           Current   Change   Status
NYSE          76.5    + 0     Bull Confirmed
NASDAQ-100    72.0    - 2     Bull Correction
Dow Indust.   90.0    + 0     Bull Confirmed
S&P 500       86.2    - 1     Bull Confirmed
S&P 100       87.0    + 0     Bull Confirmed


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

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


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

 5-dma: 1.06
10-dma: 1.03
21-dma: 0.99
55-dma: 1.04


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


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1412      1404
Decliners    1426      1635

New Highs     210       135
New Lows       12         8

Up Volume    776M      708M
Down Vol.   1032M     1038M

Total Vol.  1820M     1828M
M = millions


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

Commitments Of Traders Report: 01/27/04

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

Commercials are beginning to hedge their bullishness from two
weeks ago but the changes are mild.  In the mean time small
traders have become even more bullish with a strong decline
in open short positions.


Commercials   Long      Short      Net     % Of OI
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%
01/27/04      417,089   410,930     6,159     0.7%

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
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%
01/27/04      143,089    87,828    55,261    23.9%

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

In contrast to the larger S&P contracts above, commercial
traders dramatically increased their long positions in the
e-minis but remain overall net short.  Small trader pared
back some of their exuberance from the previous weeks.


Commercials   Long      Short      Net     % Of OI
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%)
01/27/04      291,166   334,618    (43,452)  ( 6.9%)

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
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%
01/27/04     154,485     60,556    93,929    43.7%

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


NASDAQ-100

There is little change to report in the commercial positions
while small traders are hedging their bets almost 50/50.


Commercials   Long      Short      Net     % of OI
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%
01/27/04       43,704     40,951     2,753    3.3%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
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%)
01/27/04       10,137    10,715   (   578)  ( 2.8%)

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 have reached their most bullish stance in four
weeks on the Dow and in perfect timing the small traders
are at their most bearish over the last month.


Commercials   Long      Short      Net     % of OI
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%
01/27/04       16,536     8,404    8,162      32.7%

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
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%)
01/27/04        7,240    12,372  ( 5,132)   (26.2%)

Most bearish reading of the year: (10,136) - 12/16/03
Most bullish reading of the year:   8,523  -  8/26/03

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


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The Option Investor Newsletter                  Tuesday 02-03-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: ABK, DHR, ESRX, GENZ, HSIC, IBM, IMDC, MWD
Dropped Puts: TEVA
Call Play Updates: EASI, QLGC
New Calls Plays: AVID
Put Play Updates: None
New Put Plays: KSS


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

Kohls Corp - KSS - close: 45.00 change: +0.57 stop: 45.05

It boggles the mind.  Almost no one expects KSS's same-store
sales numbers, expected on Thursday, to be any good.  The company
didn't have the best holiday season and analysts believe that
apparel retailers in general had a poor January with the only
sales fueled by steep markdowns.  So why is KSS trading higher
and breaking through resistance at its 40-dma, 50-dma and the
$45.00 level?  That's a good question that we don't have an
answer for.  It is believed that a few months down the line KSS
will have easier year over year comparisons because last year's
numbers were so bad.  Whatever the case, we are stopped out at
$45.05.

Picked on January 27 at $44.05
Change since picked:    + 0.95
Earnings Date         02/26/04 (unconfirmed)
Average Daily Volume:      4.6 million
Chart =



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

Ambac Financial Group - ABK - close: 76.83 chg: -0.06 stop: 71.99

The insurance sector has been pretty strong the last four days
and shares of ABK are following suit.  Yesterday we saw ABK
continues its surge higher by breaking out above resistance at
$75.00 on decent volume.  Plus, the markets had four insurers
report earnings last night after the bell (AFL, NFS, PFG, RE) and
overall the numbers were strong.  It's encouraging to see ABK
hold onto its gains but don't be surprised to see shares dip a
little in profit taking.  We'd consider new entries on a dip
between $75-76.

Picked on February 1 at $74.77
Change since picked:    + 2.06
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      476 thousand
Chart =


---

Danaher Corp - DHR - close: 91.47 cls: -0.37 stop: 87.99

The sideways churn in the markets these last couple of days have
given DHR a chance to digest some of its recent gains after
rebounding from its 50-dma.  Traders can watch for a potential
retest of the $90.00 level as support and use the bounce as a new
entry point.  More conservative traders may feel better waiting
for DHR to clear its short-term trend of lower highs by crossing
above the $93.00 level.  DHR's Vice President made a presentation
this morning at the Thomas Weisel Tech 2004 conference but there
didn't appear to be any stock-moving news in the presentation.
Tomorrow DHR's President and CEO will be presenting at the Lehman
Brothers Industrial Select conference.

Picked on January 30 at $91.01
Change since picked:    + 0.46
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =


---

Express Scripts - ESRX - cls: 70.00 chng: +0.72 stop: 65.50*new*

Soaring through the stubborn $70 resistance level this morning,
it looked like ESRX had finally managed the elusive breakout
we've been waiting for.  But with a lack of strength in the
overall market, the stock lost momentum and fell back at the end
of the day to end right at $70.  While it was disappointing to
see ESRX unable to hold all of its intraday gains, the stock did
manage to eke out a new recent closing high and the bullish trend
is still intact.  Another encouraging point is the way price has
rebounded the past two days on the brief forays below the 10-dma
(currently $68.99), proving that average continues to act as
support.  Rebounds from above $68 still look like the best entry
point, as we patiently wait for ESRX to make its way up to our
initial target at $72.  The clock is ticking, but there are still
three weeks until the company's earnings report, so buy the dips
to support and hold on through the volatility.  Raise stops to
$65.50, which will be below the 50-dma by tomorrow.

Picked on January 13th at    $68.32
Change since picked:          +1.68
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =     1.09 mln
Chart =


---

Genzyme Corp. - GENZ - close: 57.09 change: +1.12 stop:
53.00*new*

After a couple weeks of volatile consolidation, the bulls finally
gained the upper hand today, with GENZ breaking out over the $56
level to close above $57 for the first time since the end of
2001.  It would be nice to see volume running a bit stronger, but
it seems clear that the bulls are intent on driving the stock
through the $57-58 resistance level and making a run at the 2001
highs in the $60-61 area, which just happens to be our target for
the play.  The initial move from $50-55 appears to be the first
leg of the rally and today's breakout above resistance gives a
bullish resolution to the consolidation flag pattern and provides
a measurement objective $5 above the $56 breakout, or $61.  Isn't
it nice to have our target confirmed like that?  A pullback and
rebound from the $55-56 is probably our last shot at a decent
entry into the play, as from here on out the play should be about
maximizing gains.  To that end, we're raising our stop to $53
tonight, as that will be below the 20-dma by tomorrow.

Picked on January 20th at    $53.00
Change since picked:          +4.09
Earnings Date               2/19/04 (unconfirmed)
Average Daily Volume =     2.86 mln
Chart =


---

Henry Schein - HSIC - close: 71.36 chg: +1.33 stop: 68.00*new*

Headlines continue to be scarce for HSIC but that didn't stop
buyers for bidding up shares this afternoon.  The recent
consolidation above the $69.00 level may be over.  Today's rally
looks like a decent entry point for new positions while momentum
traders may want to wait for HSIC to clear its recent high at
72.26.  We are going to inch up our stop loss to 68.00, about 25
cents below the simple 50-dma.

Picked on January 22 at $70.65
Change since picked:    + 0.71
Earnings Date         03/04/04 (unconfirmed)
Average Daily Volume:      334 thousand
Chart =


---

Int'l Bus. Machines - IBM - cls: 99.99 chng: +0.60 stop: 95.50

Does that count as an activated trigger?  When we initiated
coverage of IBM, we set an entry trigger at $100, and the stock
finally pushed through recent resistance to hit that mark exactly
in the final hour, before closing just a penny off that mark.
We'll say yes, that our trigger has been satisfied, with the
understanding that there is likely to be a near-term pullback in
the morning as the market seems to have disliked something it
heard in CSCO's earnings report after the bell.  Look for a
rebound from above $99 to provide a slightly better entry point
tomorrow or else wait for a decisive move over the century mark.
Based on the price action of the past couple weeks, support
really should hold above $97, so we shouldn't see our $95.50 stop
threatened, especially with the 20-dma ($95.69) now above that
level.

Picked on February 1st at    $99.23
Change since picked:          +0.76
Earnings Date               4/15/04 (unconfirmed)
Average Daily Volume =     5.52 mln
Chart =


---

Inamed Corp - IMDC - close: 51.70 chg: +0.36 stop: 48.00

Another of our bullish plays in the medical equipment and
supplies industry, IMDC, is slowly creeping higher.  Granted it
appears that bulls are having to fight for today's gains.  The
short-term up trend remains and shares continue to offer traders
a bullish entry point here above $50.00.  If you're more of a
patient investor, then wait to see if IMDC dips again toward the
$50.00 level and buy the bounce.

Picked on February 01 at $51.54
Change since picked:     + 0.16
Earnings Date          02/24/04 (unconfirmed)
Average Daily Volume:       682 thousand
Chart =


---

Morgan Stanley - MWD - close: 57.78 chg: -0.27 stop: 56.75

Last week the XBD and MWD both saw a sharp decline.  The selling
in MWD stopped at its simple 50-dma and price support at $56.76.
Shares of MWD immediately began to bounce higher as did the XBD
to a lesser degree.  Now it seems like the rally is fading.
MWD's intraday high on Monday failed at its 10-dma and today it
traded in a very tight range for most of the session.  Likewise
we're seeing the bounce in the XBD broker-dealer index begin to
stall.  Are bulls merely catching their breath?  Or is this a
prelude to another decline?  We're currently very cautious on MWD
and do not suggest new entries at this time.  If you're feeling
bullish on the sector then consider Goldman Sachs (GS), which out
performed today with its own rebound above the $100 level.

Picked on January 15 at $59.81
Change since picked:    - 2.03
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million
Chart =



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

Teva Pharmaceutical - TEVA - cls: 64.66 chng: +1.42 stop: 61.00

Company Description:
Teva Pharmaceutical Industries Ltd. is a global pharmaceutical
company producing drugs in all major treatment categories.  Teva
has utilized its production and research capabilities to
establish a global pharmaceutical business focused on the growing
demand for generic drugs and on the opportunities for proprietary
branded products for specific niche categories.  Teva's active
pharmaceutical ingredients business provides both significant
revenues and profits from sales to third-party generic
manufacturers and strategic benefits to the company's own
pharmaceutical production through its delivery of significant raw
materials.

Why we like it:
There's a powerful change underway in the Pharmaceutical sector,
with the big Pharma stocks like Merck, Lilly and Pfizer feeling
the pinch from increased competition.  That competition is coming
from the generic drug manufacturers, who in addition to horning
in on the production of many blockbuster drugs of yesteryear, are
developing and producing their own products.  TEVA is a great
example of the strength in this sector, as the stock has built a
pattern of delivering a strong rally, consolidating and then
delivering another strong rally.  The last time the stock was on
the move was the rally from March through June that took TEVA
from the $37 area to $60.  Since June, TEVA has been trading
sideways in a broad consolidation flag between roughly $55-62.
After completing its acquisition of Sicor, shares of TEVA shot
higher on 1/22-23, making an initial push over the top of the
months-long range.  After a week of consolidation just under that
$62-63 resistance, TEVA is on the move again and with the
breakout of the past couple days, it looks like the bulls have
had enough of this consolidation and are in the process of
driving the stock to its next plateau.

A quick look at the PnF chart shows the strength of the stock
with a Bullish Catapult breakout.  The late-November rally
created a fresh Buy signal and that produced a bullish price
target of $77.  That lines up nicely with the measurement
objective on the break from the long-term flag consolidation,
which gives a bullish target of roughly $80.  Of course, we don't
need to capture the entire move, just a solid chunk from the
middle.  Besides that, we have a time limitation to deal with, as
TEVA is set to report earnings on February 17th.  With the
breakout already underway, momentum traders can enter on further
strength above the $65 level.  But our preference is to wait for
a slight pullback to confirm support in the $62.50-63.00 area
before entry.  We'll target a rally up to the $70 level as our
objective for the play and use an initial stop at $61, just under
the bottom of last week's consolidation.

Suggested Options:
Shorter Term: The February $65 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.

Longer Term: Longer-term traders can use the March $65 Call,
while the more conservative approach.  We've listed a limited
number of strikes on TEVA due to limited strike selection with
acceptable open interest.  Our preferred option is the March $65
strike, which is at the money and should provide sufficient time
for the play to move in our favor.

BUY CALL FEB-60 TVQ-BL OI=5375 at $5.20 SL=2.75
BUY CALL FEB-65 TVQ-BM OI=1771 at $1.25 SL=0.60
BUY CALL MAR-65*TVQ-CM OI=3264 at $2.10 SL=3.50

Annotated Chart of TEVA:



Picked on February 3rd at    $64.66
Change since picked:          +0.00
Earnings Date               2/17/04 (unconfirmed)
Average Daily Volume =     2.66 mln




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

Eng. Support Systems - EASI - cls: 49.01 chng: -1.23 stop: 54.00

Proving the wisdom of using an entry trigger below support, EASI
caught a bounce on Monday, surging almost to the $52 level before
the bulls lost their nerve.  The bearish price action that first
drew us to the stock reasserted itself today though, with EASI
opening at its high and closing just off the low.  Key support
continues to be just above $48 and until that level is broken,
remaining on the sidelines looks like the best choice.  In
addition to horizontal support, there's the 100-dma ($48.46)
propping up the stock, but once it gives way, we could see a
rapid slide down towards next support at $45 and then on to our
eventual target at $40.  Our choice for entry is to jump on board
as the initial breakdown takes place.  More conservative traders
can wait for a subsequent failed bounce below $50, but will run
the risk of missing the move altogether.  Maintain stops at $54
until the breakdown occurs, but after a sub-$48 close, we'll be
looking to tighten that stop to just above $52.

Picked on February 1st at     $50.00
Change since picked:           -0.99
Earnings Date                3/09/04 (unconfirmed)
Average Daily Volume =         377 K


---

QLogic Corp. - QLGC - close: 43.59 change: +0.69 stop: 46.50*new*

It certainly hasn't been speedy, but QLGC is behaving itself
rather nicely as it continues to work its way lower in the
descending channel we pointed out over the weekend.  Yesterday's
bounce attempt was quickly turned back just below the 10-dma
($45.19), just below the top of that short-term channel,
resulting in a sharp drop to close just under the $43 level.
Since that produced a test of the bottom of the channel, a near-
term bounce made sense and that's just what happened today,
helping to alleviate the near-term oversold condition.  QLGC has
some work to do to make its way down through this near-term
support, but our initial target at $41 is looking more achievable
by the day.  And if the SOX does break the $500 support level,
then we could be looking at a breakdown to the $38 area.  Use
failed bounces below the top of the channel and the 10-dma to
initiate new positions and lower stops to $46.50, which is
comfortably above the top of last Friday's failed rebound.

Picked on January 22nd at    $45.25
Change since picked:          -1.66
Earnings Date               4/14/04 (unconfirmed)
Average Daily Volume =     3.94 mln



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

Avid Technology - AVID - close: 43.86 chg: +0.41 stop: 46.17

Company Description:
Avid Technology, Inc. is the world leader in digital nonlinear
media creation, management and distribution solutions, enabling
film, video, audio, animation, games, and broadcast news
professionals to work more efficiently, productively and
creatively. For more information about the company's Oscar.,
Grammy., and Emmy. award-winning products and services, please
visit: www.avid.com. (source: company press release)

Why We Like It:
A big volume drop that breaks multiple levels of support?  What's
not to like?  The company recently reported earnings that beat
the estimates on net income and revenues and investors still sold
the news.  Throw in a couple of broker downgrades and the stock
drops even faster.  We admit that the stock already looks
oversold on a short-term basis and for many traders it may not be
best to chase it.  However, on a technical level the stock looks
pretty weak and each intraday bounce in the last few sessions has
been used to exit the stock.  P&F chart fans will note that its
current vertical count points to a $30.00 price target.

We are going to try and protect ourselves by using a TRIGGER.
Shares of AVID painted an "inside day" so we're going to use a
TRIGGER at $42.87, just under yesterday's low.  Until AVID trades
at or below this level we'll sit on the sidelines.  Don't be
surprised to see AVID bounce.  However, if we are triggered then
we'll use a stop loss just above yesterday's high at $46.17 and
above its simple 200-dma.  We would expect the $40 level to offer
some support but AVID can probably trade to the $38.00 region,
which represents a 50% retracement of its big 2003 run up.

Suggested Options:
February strikes don't have much time left so we're going to
suggest the March or June puts.  Our favorite is the March 45s.

BUY PUT MAR 45*AQI-OI OI=2168 at $4.10 SL=2.15
BUY PUT MAR 40 AQI-OH OI=3162 at $1.90 SL=1.00
BUY PUT JUN 45 AQI-RI OI= 648 at $6.30 SL=3.75
BUY PUT JUN 40 AQI-RH OI= 276 at $4.00 SL=2.25

Annotated chart:



Picked on February xx at $xx.xx
Change since picked:     - 0.00
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       612 thousand
Chart =



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The Option Investor Newsletter                  Tuesday 02-03-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Insurance, Drugs and Tech
Traders Corner: SQUARE OF NINE


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

Insurance, Drugs and Tech

___________________________________________________________________

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.
___________________________________________________________________


XL Capital Ltd - XL - close: 79.67 change: -0.23

WHAT TO WATCH: Insurance stocks have been pretty strong lately
and given their string of positive earnings results they may
continue to out perform.  XL has earnings on February 12th and
could see its own pre-earnings ramp up.  Look for a breakout
above resistance near $81.00.

Chart=


---

Merck & Co - MRK - close: 48.50 change: +0.43

WHAT TO WATCH: This Dow component appears to be on the rebound.
The month of January has seen MRK try multiple times to breakout
over resistance above 48.00-48.25 and it may have done it today.
There is potential resistance at $50.00 and its 200-dma near
52.50 but it looks like a bullish play.

Chart=


---

Intel Corp - INTC - close: 31.40 change: +1.08

WHAT TO WATCH: We're surprised that the SOX held up so well
considering Goldman Sach's downgrade of the chip sector last
night to neutral.  Contributing to the SOX's ability to hold
above support at the 500 level was Intel's strong 3.5% bounce.
There didn't seem to be any catalyst for the bounce other than
INTC finally hitting support at $30.00 yesterday.  The top of the
recent trading range is $34.50.

Chart=


---

Cisco Systems - CSCO - close: 26.41 change: +0.21

WHAT TO WATCH: CSCO is the big tech stock earnings event this
week and they announced after the close tonight.  Estimates were
for 17 cents a share on revenues of $5.2 billion.  CSCO turned in
18 cents a share on revenues of $5.4 billion.  Chambers had some
positive comments on the global economy but the stock was trading
lower after hours.  It will be interesting to see if the weakness
holds up tomorrow during the normal session.  Currently CSCO has
support at $25.50 and its simple 40-dma.

Chart=



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

SGP $18.34 +0.44 - SGP is another drug stock that appears to be
attracting investor interest.  Look for a move above the $18.50
level.

PFE $37.71 +0.30 - Yesterday PFE broke out to a new high after
the FDA approved two new drugs (one of which it is marketing).
PFE came back to test resistance at $37.00 as support and
bounced.

FRX $76.03 +0.57 - We're detecting a theme here.  FRX, another
drug stock, has been climbing steadily and investors has been
pushing shares higher with a trend of higher lows.

LTR $54.59 -0.09 - Keep an eye on LTR.  The company announces
earnings in a few days and odds of a sell the news event are
strong after 11 consecutive weeks of steady gains.

TIF $38.90 -0.59 - A number of retailers will be announcing same-
store sales data this Thursday. We don't know if TIF is one of
them but analysts don't have high expectations for January.
Meanwhile TIF is slipping lower towards support at its 200-dma.


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SQUARE OF NINE

I believe it is important that we begin this discussion on the
Square of nine analyses, first with a few thoughts.  There is a
lot of misinformation out there related to the theory of Gann
analysis that is available to the novice trader. Many other ways
of trading methodology include the use of Fibonacci, Andrews or
Elliott may be related to some aspects of Gann, but be careful of
many people out there that group some or all of the above methods
under the umbrella of the Gann theory. They are totally
misguided. Next you must have a basic understanding of price
movement to be successful in trading. This knowledge is the
foundation of analysis and everything else is built around it.
Gann, Elliott, or even oscillators all present certain
probabilities, but the only thing that is a certainty is what
price action is telling you on the chart on your screen. The
pattern in the movement of prices should justify the probability
that your indicator is giving you the correct signal. Quoting
Mr.Gann, “ Whenever price and time are squared, you can look for
a change in trend.” The key word in his statement is “look.” This
means that look for some evidence that the trend has changed
before positioning yourself on that probability. In my style of
trading, I use the CCI. But whatever you use be it MACD,
Stochastics, RSI or your other favorite indicator, look for a
divergence in the price and the oscillator when price action
comes into play with one of the Square of Nines.

The predictive strength of the Square of Nines I believe it   can
be a very powerful asset when trading stocks, bonds, options and
futures. The Square of Nines is one of Gann’s best tools. It is
called that because the numbers one through nine complete a
square in the center of a diagram.

To appreciate the Square of Nine in terms of it’s geographic
origins, look at the diagram below and visualize it an a pyramid.
The importance of the pyramids in mathematics and number sequence
such as the Fibonacci’s forecasting can be found in scores of
books but we will concentrate on the Square of Nine.






The apex of the pyramid is the number one with four equal-sized
triangular walls descending down to a square base. Each block in
the pyramid is given a number and each block has a cousin, which
is the exact same relative position on the other three walls.
These related cousins are separated precisely by intervals of
90,180,270 or 360 degrees. If each of these blocks were a price,
then possible turning points would be found when prices reached a
point 90,180,270 0r 360 degrees away from the original starting
price recorded. You may want to print out this table so you can
follow along in the discussion below.

Just as an example I will use a stock that is trading now at $15
because if I used a Gann Wheel where the ES or the YM are trading
now, it would not fit in this format. The number 15 is perfectly
aligned under the 90-degree angle. On this chart find the number
316 at the top of the diagram and this will be the 90-degree
angle. The 45-degree price objective would be 17 and the 0 and
360 degree price objective would be 19. Follow around to the
number 23 and that would be the 270-degree angle. Please continue
around still to the number 11 and that would be the 180-degree
line. Now I skipped the bottom right corner angle and many others
butlike in Fibonacci, some calculations are more important than
others. The Fibonacci ratios 0.382, 0.500, 0.618, 1.000, and
1.618 are relationships we know that are critical areas to watch
in the markets. This is also how the various Gann angles are
interpreted. The angles that are most important in the financial
markets are 0,45,90,180,270 and 360. Now many traders use the
Square of Nines and calculate every 22.5 degrees out. But for me
I basically only use the above numbers when I am trading the YM.
If you had every angle plotted on your chart every 22.5 degrees
you would have a line every 15 – 20 points or so. When using it
with the ES, I do have all the numbers plotted as they are a bit
more spread out but key on the major angles most of the time.

I am presently using Ensign Software for my charting program,
which calculates all these numbers automatically for me. They are
always on my chart no matter if price goes to zero or to 20,000.
The Square of Nines goes on to infinity and as the price of the
YM, ES, or whatever you are following goes around the Gann Wheel
like in the example above, you always come back to those Square
of Nine numbers using the same angles as support and resistance.
I have been only using these Square of Nine calculations for only
about a year now but I can tell you I would not trade without
them. I don’t have in front of me the mathematical formula for
figuring out these numbers but why bother when they are
calculated in the charting program for me.

In the YM 233 T chart from Friday’s trading, you can see a
classic setup. There was the daily pivot at 10457 and the
strongest magnet of them all, a 180-degree SON at 10456. Note the
open price was 10456 as well. I look for divergence in the CCI
and for price to come back through that area for a short signal.
Running out of space and time. Hope you understand a little more
about the concept of Square of Nines and how they are used. Will
talk about this more another time another day.

Good trading to you all.    Larry Wales





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