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Daily Newsletter, Thursday, 02/05/2004

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The Option Investor Newsletter                Thursday 02-05-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Moment of Truth
Futures Markets: Dollar Jumps on Fed Comments
Index Trader Wrap: Jobs with inflows and outflows
Market Sentiment: All About Jobs


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-05-2004           High     Low     Volume Advance/Decline
DJIA    10495.55 + 24.80 10522.52 10453.55 1.96 bln   1703/1513
NASDAQ   2019.56 +  5.40  2031.39  2012.79 1.94 bln   1777/1423
S&P 100   559.61 +  0.74   560.81   557.41   Totals   3480/2936
S&P 500  1128.59 +  2.07  1131.17  1124.44
W5000   10974.04 + 24.50 10998.18 10935.34
RUS 2000  569.54 +  5.51   570.90   564.03
DJ TRANS 2833.59 + 11.50  2843.81  2821.76
VIX        17.71 -  0.16    17.99    17.60
VXO (VIX-O)17.75 +  0.17    18.39    17.66
VXN        26.17 -  0.48    26.81    25.96
Total Volume 4,230M
Total UpVol  2,365M
Total DnVol  1,809M
Total Adv  3900
Total Dcl  3376
52wk Highs  279
52wk Lows    18
TRIN       0.82
NAZTRIN    1.02
PUT/CALL   0.76
************************************************************

The Moment of Truth

Friday morning at 8:30 AM is the moment of truth for the
markets. At least that is what the talking heads were telling
traders all day. It is important but like all things economic
the outcome may have already been baked into the cake.

Dow Chart - Daily


Dow Chart - 30 min


Nasdaq Chart - Daily




Economics for Thursday put a little more fear into those who
were worried about the Nonfarm Payroll report when the Jobless
Claims jumped +17,000 to 356,000. This was the first time in
four weeks that the number was over 350K. Last weeks claims
were revised down -3,000 and analysts theorize weather was
the depressing factor. Those snowbound in the prior week
finally got out to make claims last week. Ironically the
unadjusted claims decreased in 51 states and territories
but the total number of weekly claims rose.

There are numerous conflicting employment components for the
various monthly reports. Some show minor job growth, some
show minor job declines. NONE show any significant improvement
in job creation. Is this like the emperor's clothes? Nobody
can see any jobs but everyone assures us they are there?

One analysis suggested that during the two survey weeks for
the nonfarm payrolls continuing Jobless Claims fell by 116,000.
The payroll survey is done around the 12th of the month. They
were suggesting that this would translate into an increase in
jobs of +125,000 tomorrow. Dow Jones is expecting +160,000,
the street is looking for +175,000 and one analyst on CNBC
was expecting +225,000. With estimates all over the map but
up significantly from just a couple days ago we are poised
again for a potential disappointment.

Last month the estimates were also in the same ranges and
the number was barely positive at +1,000. Various Fed heads
almost promised that those missing jobs would be found in
tomorrow's number. This has setup the markets for another
failure in confidence. At this point I am not really
concerned due to the market action this week. I think
cautious traders have already positioned themselves for
the worst and are now hoping it is just not as bad as they
expect. I think they would be relieved to just have a
positive number again. Don't forget the Challenger Layoff
report from Monday showed a +26% jump in announced layoffs
for the month over the December levels.

With the Fed on hold due to the light GDP a blowout number
could actually turn up the heat again. Any light number
will just be seen as more slow growth and not a real problem.
Should the number come in negative I would not only be very
surprised but I would expect the market to react negatively.

The Productivity report for the 4Q rose by +2.7% according
to Thursday's release. Maybe I should say dropped to only
+2.7% growth since this was the slowest growth since 2002.
The 1Q increased +3.1%, 2Q +6.1% and the 3Q soared +9.5%.
The drop back to a realistic number simply showed that the
rapid unsustainable pace of growth was just returning to
normal. Hours worked rose while unit labor costs fell and
this suggests manufacturing will not let price prevent any
new hiring.

After several days of weakness the major averages managed
to close in the green but it was not a stunning performance.
The Dow closed under 10500 once again and the Nasdaq closed
exactly on its 50 dma at 2019. Traders felt the Wednesday
drop was significantly overdone but they were not confident
enough to buy stocks before the Jobs report. WMT, HON, KO,
IP and BA were the biggest gainers on the Dow and helped
overcome losses by IBM. MSFT and INTC were down fractionally
and MSFT suffered one additional embarrassment. PFE passed
MSFT in terms of market cap pushing MSFT to 3rd place behind
GE and PFE.

The CSCO depression continued in the big cap techs with
CSCO falling to mid-December lows. INTC closed under its
100 dma and under $30. It was the lowest close since
Oct-9th. Dell closed at 32.11 and the lowest close since
August. Dell is well under its 200 dma at 33.34. With all
the majors so severely under water it is amazing the Nasdaq
is holding at the 50 dma. We have had two significantly
down days on the 28th and again on the 4th. Other than
those we have been trading sideways in a consolidation
pattern. Treading water for all practical purposes. We
still have strong emotional support at 2000 and we are
at the uptrend average support that has held since March.
The techs have pulled back to their strong support level
on decent profit taking to await the jobs report. No big
surprise there. Earnings have been good and there is
nothing to prevent us from moving higher. Each bounce is
sold but each dip is bought and this is the area where
consolidation was expected. Just look at the Nasdaq
chart above if you have any doubts about support.

The SOX has pulled back to its 100 dma at 495 and has
held there for two days despite some continued slippage
by several chip stocks. This is the key for the Nasdaq.
The SOX has not touched the 100 dma since April 2003.
This is a major sell off in semiconductors and this is
the critical support level. We could see one more dip
to horizontal support at 480 but that would be a major
break that should be bought.

SOX Chart - Daily



The Russell-2000 also pulled back to its 50 dma at 564
and rebounded slightly. The Russell has tested the 50
dma six times since March and rebounded each time. This
level needs to hold. If we suddenly get a break of the
50dma on the Russell and the 100dma on the SOX then it
could be serious. Until that happens I am still in buy
the dip mode.

Russell Chart - Daily



The Dow is consolidating nicely above the 10450 level
and has been in the same range for six days. It is still
above 10400 support and the 50 dma near 10300. We could
easily move up from here or move down slightly with no
real damage. The 50-day average has not been tested since
Thanksgiving and any real dip could easily retest that
10300 level. The blue chips are holding up the techs and
the small caps. This is exactly the reverse from the last
two months where the small cap techs lead the charge.

We appear to be seeing a rotation from prior high risk
leaders and into the defensive blue chips like drugs.
Cyclicals like AA, IP, CAT, MMM and DE are being sold
on worries that the recovery is slowing. Drugs like MRK,
LLY, SGP and PFE are seeing a flood of money as defensive
value stocks. They suffered during the recent rally in
favor of the techs. Traders are simply rotating funds
back into the defensive issues. SGP is at a six month
high and PFE hit a new twenty-one month high today.

The good news is that this is normal for a new year but
just a couple weeks later than usual. The last week of
selling has been on significantly lower volume and it
appears to be just a normal consolidation period. The
next hurdle is the Jobs report on Friday. Regardless
of the outcome there will be volatility. Those still
wising to sell will probably use any good news to dump
stocks. The odds of a sell the news event on are very
good despite the results. Personally I think the odds
of new job growth over 100,000 are very slim but what
I think does not matter. The market will react to the
number and how it impacts the recovery scenario and
the chances of a Fed rate hike. Friday is immaterial to
the larger scheme of things. Monday is the key day for
me. How the market responds on Monday to any Friday
event will tell us if the rally has any legs left.

If traders were focused entirely on earnings there would
be no doubt of direction. Over 70% of the S&P have now
announced and 67% have beaten estimates. 19% announced
inline and only 14% have disappointed. This is very good!
Overall earnings are now expected to be in the +27% range
or better for the 4Q. This is the second highest in recent
history with only 3Q-1993 higher at +30% growth. That
quarter's results sent the Dow on a vertical ramp in the
4Q to nearly 4000 in January-1994. Once the 4Q earnings
fell short of the miraculous 3Q results the Dow crashed
-12% beginning in the last week of January to nearly 3500
by the end of March. It traded sideways for the entire
year and did not reach 4000 again until February-1995.

If we could use this historical trend as a model it would
suggest that the 1Q should ramp to the heavens as traders
buy the chance for an even stronger 1Q-2004. Since the
comparisons are harder for Q1 than Q4 the odds of a repeat
are tougher. The majority of guidance for Q1 has been
coming in higher and I suspect that has kept the market
from falling under its own weight more than anything else.
In about two weeks we will start to get the mid-quarter
updates and the beginning of any earnings run for April.
That makes the next two weeks very critical. If we can
get past the Jobs report the economic calendar next week
is fairly light. There is a flurry of reports but none
are really important milestones.

The bottom line is don't let any negative Jobs commentary
on Friday or any negative market reaction bother you. Wait
for Monday and let's see how the market responds. If we
drop on Monday then be worried. There is a lot of money
on the sidelines looking for an entry point and Friday's
market action could lure them into the game. The odds are
good the Jobs outcome has already been baked into the cake
and Monday is the real moment of truth.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Dollar Jumps on Fed Comments
Jonathan Levinson

Bernanke moved the markets today, iterating the Fed's
perception of a decrease in the risk of deflation.  Bonds and
metals fell, the dollar rose, and equities advanced modestly.

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 Bank of England hiked rates by 25 bps this morning, initial
claims exceeded to the upside, preliminary Q4 productivity
numbers came in within the expected range and Ben Bernanke made
some comments in the early afternoon.  I'll let the intraday
chart fill in any remaining blanks, of which there appear to be
none.  For the day, the CRB added .55 to close at 260.50, led by
soybeans, lean hogs, live cattle and corn futures, with natural
gas, sugar and cotton bringing up the rear.


Daily chart of February gold


Paraphrasing from what I gleaned from the ticker headlines and
without reading the no-doubt abundant details, Ben Bernanke made
comments today to the effect that the risk of deflation had
lessened but that the Fed still did not see much risk of
inflation.  The very suggestion that the Fed might not still be
terrified of deflation was sufficient to spark a burst of buying
in the US Dollar Index, selling in bonds and in precious metals.
April gold broke below the 399 floor of the past two days but
stopped at 397.90 before reversing weakly.  The morning high
printed at 402.40.  The daily cycle bounce remains tenuous,
support in the 392-395 area remains unchallenged.  April gold
closed lower by 3.20 at 398.00, while the miners gained 1.88% for
the HUI and 1.38% for the XAU, closing at 216.75 and 96.23
respectively.


Daily chart of the ten year note yield


Bonds got torched following Bernanke's comments, presumably on
the assumption that if the Fed saw the risk of deflation on the
wane, then it would be less inclined to employ measures such as
the outright purchase of treasuries and the continued maintenance
of rates at multidecade lows.  A bullish engulfing candle on the
ten year note yields (TNX) finished high by 5.1 bps at 4.175%, a
1.24% gain for the day.  The current range has resistance at
4.2%, support at 4.08%, and the daily cycle upphase continues
unabated.


Daily NQ candles


One might expect that, just as bonds and equities sold off
following the last FOMC announcement, Bernanke's comments today
would have caused the same effect.  They didn't, as NQ traded in
the green for nearly the entire day, touching a high of 1477
before retreating.  The daily cycle downphase twitched but did
not abort, and a move above 1480 should be sufficient to pause
the cycle.  Above 1492-6 resistance, I'd expect to see the first
buy signal printing.  While 1462 has held so far, we see
confluence at 1456, with rising trendline support below that at
1440.  The NQ is caught between a rock and a hard place, and with
a great deal of selling having occurred to bring it here.  This
is no place for bears to allow their open shorts too much room,
as the next directional move could well be to the upside. NQ
gained 4 to close at 1467, a .27% gain for the day.


30 minute 20 day chart of the NQ


The NQ continued to struggle within its steeply falling channel
on the 30 minute candles.  The last bear flag actually broke to
the downside, one increasingly rare occasion in which a bearish
pattern has actually fulfilled.  The current bear flag commencing
yesterday afternoon has a steeper slope, suggesting strength.
However, the move coincided with a generally weak 30 minute cycle
upphase, and if this has been a sideways-up move within a flag
pattern, it could well break lower again.  To keep it simple, a
move above 1475 (confirmed by a break of 1482) or below 1466
(confirmed by a break of 1462) will constitute a range break.


Daily ES candles


ES printed a higher low and lower high as it squeezed tighter
into the 30 minute pennant illustrated below.  The move printed
the bulk of today's price and volume action below the rising
upper channel trendline, the first such print this year.  That
alone wouldn't get me shorting with both barrels, particularly as
the trendline itself is my own artistic interpretation of the
chart, but it's nonetheless interesting.  The daily cycle
downphase extended as the 1122 support held for yet another day.
While 1115-1118 is significant support, 1122 is running a
beautiful interference.  1130.25 was the high, just at the door
to resistance stretching to 1136.  The 30 minute chart helps us
to refine this further, but for the moment, the ES finds itself
like the NQ between a rock and a hard place, albeit having
sustained far less technical damage. ES added .22% or 2.50 to
close at 1126.50.


20 day 30 minute chart of the ES


The 30 minute ES didn't challenge the descending trendline I've
been using to approximate the upper limit of the idealized daily
cycle downphase channel.  It too drifted mostly sideways on a 30
minute oscillator upphase that held for the afternoon.  Again,
price is narrowing into a flat wedge, and it remains to be seen
whether this daily cycle downphase will prove to be the right
shoulder of a head and shoulders top (neckline anywhere between
1115 and 1123) or a bull flag of sorts.  Above 1130, we'll look
for a break of 1136 to confirm the end of the daily cycle
downphase, while below 1122-3, next support is 1115-8.


150-tick ES

It was another tight day for ES, with the intraday cycles showing
a mostly sideways drift that has chopped up the short cycle
oscillators nicely.  This is what one would expect as the ES
approaches the pennant's apex, with price drilling into a
narrowing range.


Daily YM candles


All three equity contracts traded in lockstep today, all three
advancing by equivalent amounts for a change.  YM has support a
10430, with today's low at 10432.  It resembles the ES most
closely, still trading within an uncertain daily cycle downphase,
a head and shoulders that will either deliver to the downside or
fake out pattern followers yet again, as so many others have done
this year.


20 day 30 minute chart of the YM


The YM is the only one of its peers to hold the primary flag
support and to break its descending trendline.  It's either
leading its peers and hinting of a bullish breakout, or merely
lagging their weakness.  We should find out soon enough as ES and
NQ approach their pennant apexes (apices?).

The move higher in the dollar lined up with a move lower in
treasuries and, to a lesser extent, in precious metals futures.
The mining equities advanced along with broader equities, which
was an anomaly when compared with the reaction to the FOMC
announcement that brought down all assets against the US Dollar
Index.  Rather than wrack our brains over it, it's easier to
follow the now well-defined support resistance zones governing
the current range.  These pennants won't last forever, and we
should be rewarded for our patience with a directional move when
they break.  See you tomorrow.


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

Jobs with inflows and outflows

The major indices traded in a rather tight range today, where
surprising strong reports from most retailers in the form of
January same store sales gave pause to recent declines.

Retailers saw consumers visiting the shopping malls in January,
as shopping became January's recreational activity of choice.
Redemption of gift cards received also helped boost sales.  As
noted in December, retailers that sold gift cards could not book
sales until gift cards were redeemed for merchandise.

Dow component Wal-Mart (NYSE:WMT) $56.25 +1.55% closed back above
its rounding flat 200-day SMA of $55.73 and helped lead the S&P
Retail Index ($RLX.X) 381.06 +1.25% to a 4.7-point gain.

But today's trade may be best described as the calm before a
storm as traders and investors alike await tomorrow morning's
release of January nonfarm payrolls data.

"The storm" could be that of rain, which is welcomed by the
farmer after experiencing severe drought conditions, perhaps
analogous to those jobseekers that have had a tough time finding
work the past few years.  But "the storm" could also be that of
heavy snowfall, where the rancher has been unable to feed his
herd of cattle, where investor's appetite for stocks may be
starved if the economy still struggles to produce jobs.

I thought CNBC's senior trading correspondent Alexis Glick, who
left Morgan Stanley as head of the firm's floor operations at the
New York Stock exchange made a good point when she said traders
and investors should keep a close eye on tomorrow's AMG Data
Services release of weekly mutual fund inflows and outflows.
While mutual fund investors are often-times made fun of by equity
traders, it is those mutual fund inflows or outflows that can
give hint of investor's appetite for stocks.  Where even a floor
trader will build or deplete inventory of stock based on this
supply/demand indicator.

After seeing a NASDAQ-100 Index (NDX.X) 1,465.03 +0.16% pull back
5.6% from its highs, tomorrow's mutual fund flow data provides a
good test for investors resolve.  For the prior week/period
ending January 28, 2003, AMG Data Services reported net inflows
of $6.3 billion to equity funds.

But it will most likely be the nonfarm payrolls data, where
economists remain optimistic for jobs growth (forecast 165,000
new jobs added) that gets greatest attention.

Monthly Payroll Data - January (Forecast) to September



In December, economists missed the mark when forecasting a gain
of 148,000 new jobs, and after adding 99,000 in September and
100,000 in October, November and December data still suggest
companies remain hesitant to hire back workers.

While I (Jeff Bailey) believe that a strengthening labor market
is on the horizon, I also understand that the S&P 500 Index
(SPX.X) 1,128.59 +0.18% is still 7.5% above its October 31, 2003
closing value of 1,050.71, and with a rising government deficit,
partially due to tax cuts and increased government spending to
help fuel and economic recovery, the sluggish addition of new
jobs, where wages can be taxed, gets great focus.

Market Snapshot / Internals - 02/05/04 Close



After a higher open, stocks treaded water for the bulk of the
session.  Just as economists remain optimistic for jobs growth,
comments from Federal Reserve Board Governor Ben Bernanke that he
was "pretty confident" that the U.S. will be posting some big
numbers on job growth soon had Treasuries traders and currency
traders responding, while equity traders seemed to take more of a
wait and see approach to things.

Just after Mr. Bernanke's statements hit the news wires,
Treasuries found selling, while the dollar reversed losses.

It was interesting to me that spot gold was flat today, never
finding a bid despite early morning weakness in the dollar, but
gold equities as depicted by the AMEX Gold Bugs Index ($HUI.X)
216.75 +1.55% found a bid as when the U.S. Dollar Index (dx00y)
86.75 -0.1% fell below its MONTHLY Pivot of 86.61 and fell
further to 86.30, before reversing back higher.

I'm not sure what to read into this, other than to think that the
move higher in gold equities is a trade that forecast a weaker
than expected nonfarm payroll report, where under that scenario,
I would think the dollar finds weakness once again, where
confidence in the dollar and perhaps the economy's ability to
generate jobs is questioned.

I should make note too, that the G7 meets this weekend, which may
also have currency traders a little jittery, bringing some
volatility into currency markets.

Pivot Analysis Matrix -



I've highlighted some correlative support/resistance levels in
the pivot matrix, which I would consider to be potentially
important levels in tomorrow's trade, where violations of these
levels could dictate price action in the weeks ahead.

I would also tie in some of the things discussed in last night's
Index Trader Wrap regarding the major indices recent pullback in
the scope of past pullbacks and some of the work we did with how
the SPX traded in relation to its DAILY Pivots for trade setups.

Today, the SPX did edge above its DAILY Pivot, but bulls may have
been cautious as the DAILY S1 of 1,133.45 was not traded.

S&P 100 Index Chart - Daily Intervals



I count 9 different equity sectors posting gains greater than 1%
compared to 3 sectors posting losses of 1% or more by today's
close, but the OEX was little budged and MONTHLY Pivot provided
resistance, while the January 29 relative low of 557.36 managed
to hold support.

My knee joint starts to ache when there is a higher level of
humidity in the air.  Is it rain, or is it snow?

Dollar/bond action today seemed to day rain, where job growth was
the forecast.

S&P 500 Index Chart - Daily Intervals



Similar to the OEX, the SPX found resistance at its MONTHLY
Pivot.  A trader sent me an e-mail today wondering he hasn't been
seeing as many buy/sell program premium alerts of late?  I think
its because institutions have the SPX at a somewhat "neutral"
level, right around that 1,125 level where we saw so much option
activity taking place in December.  Perhaps the lesser amount of
buy/sell program premium alerts is "the quiet before the storm."

One thing I would look for tomorrow to NOT happen is this.  I
expect volatility tomorrow, but if an index trades below or above
a DAILY S1 or R1, if the move has any conviction behind it, the
index should not come back through either of those levels.

For instance... if the SPX trades above DAILY R1, its should not
fall back below DAILY S1.  Conversely, in what might be deemed a
near-term "oversold" condition, should the SPX trade below its
DAILY S1, then it should not trade back above its DAILY R1.  If
it does the latter, it may be indicative of short covering, or
economic data already factored into the recent pullback.

Dow Industrials (INDU) Chart - Daily Intervals



Not much new in the INDU's chart.  IBM, which escaped yesterday's
technology selling slipped back under $100 today, while some
gains were found in lesser price-weighted components.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals



In last night's wrap we looked at a 6.72% decline in the QQQ and
compared that percentage decline to the one currently underway.
I'm also noting some very SIMILAR oscillators.  While price
action matters most, the QQQ witnessed some wild intra-day swings
for several session back in November, and it wouldn't surprise me
to see similar volatility.

Jeff Bailey


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

All About Jobs
- J. Brown

The last several days have seen the DJIA churn sideways in
anticipation or some might say apprehension of the jobs report
due out tomorrow before the opening bell.  Current estimates peg
January job growth in the range of 150,000-165,000.  Whether the
result is a blow out or a no show we're expecting some movement
in the major averages.

The markets did get some help today from Fed governor Ben
Bernake.  Bernake made some comments midday about the Federal
Reserve expecting large job growth "pretty soon".  Some chose to
believe that means tomorrow's report will be positive.  Others
suggested that pretty soon may be a hint that tomorrow's report
isn't so hot and the job growth may show up in the next couple of
months.

Investors were also happy to hear the January same-store sales
numbers.  Overall they were much better than expected.  Even the
apparel stores, which had been expected to do poorly, turned in
strong results.  Cold winter weather actually helped move their
winter inventory (imagine that!).  The International Council of
Shopping Centers reported a 5.8% jump in U.S. sales, above their
4.5% forecast.  A fundamentally bullish clue for the economy is
the confident consumer who opted to splurge at fancy retailers
like Neiman Marcus who reported a 15% jump in same-store sales.

Market internals were also bullish.  The NSYE advance decline
line showed winners outpacing losers 15 to 13.  On the NASDAQ
winners numbered 17 for every 13.6 decliners.  Up volume
outnumbered down volume on both exchanges.

The jobs report tomorrow truly is the market-moving event of the
week so prepare for some volatility.


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

Market Averages

DJIA ($INDU)

52-week High: 10701
52-week Low :  7416
Current     : 10495

Moving Averages:
(Simple)

 10-dma: 10531
 50-dma: 10291
200-dma:  9511



S&P 500 ($SPX)

52-week High: 1155
52-week Low :  788
Current     : 1128

Moving Averages:
(Simple)

 10-dma: 1136
 50-dma: 1103
200-dma: 1023



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1465

Moving Averages:
(Simple)

 10-dma: 1499
 50-dma: 1468
200-dma: 1330



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

For the first time in months we've seen the VXO (old vix) break
the trend of lower relative highs. This could mark a turning
point but like just about everything else, market direction will
depend on how investors interpret the job data tomorrow.

CBOE Market Volatility Index (VIX) = 17.71 -0.16
CBOE Mkt Volatility old VIX  (VXO) = 17.75 +0.17
Nasdaq Volatility Index (VXN)      = 26.17 -0.48

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.76        757,792       574,865
Equity Only    0.66        654,226       434,512
OEX            0.84         24,832        20,799
QQQ            1.30         48,878        63,418


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

Bullish Percent Data

           Current   Change   Status
NYSE          76.1    + 0     Bull Confirmed
NASDAQ-100    70.0    - 2     Bear Alert
Dow Indust.   90.0    + 0     Bull Confirmed
S&P 500       86.6    + 0     Bull Confirmed
S&P 100       88.0    + 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: 1.00
10-dma: 1.01
21-dma: 1.00
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    1529      1707
Decliners    1300      1369

New Highs     128       116
New Lows       12        10

Up Volume   1089M     1022M
Down Vol.    801M      865M

Total Vol.  1898M     1928M
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                 Thursday 02-05-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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


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

Morgan Stanley - MWD - close: 56.20 chg: -0.70 stop: 56.75

There were a lot of headlines out today for MWD, most of which
involve its bid to buy England's Canary Wharf real estate.  Yet
one story should have been positive for MWD.  An Illinois judge
dismissed a lawsuit claiming that MWD had overcharged a state
bond agency by $21,0000 back in 1993 (Reuters).  Unfortunately,
the news didn't seem to matter as yesterday's breakdown under the
simple 50-dma prompted more selling today.  The stock has traded
through our stop loss at $56.75.  Keep an eye on MWD for more
weakness as the recent declines have produced a major technical
breakdown of its rising channel.

Picked on January 15 at $59.81
Change since picked:    - 3.61
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million
Chart =



PUTS:
*****

None


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

Ambac Financial Group - ABK - close: 76.90 chg: -0.31 stop: 71.99

We continue to see strength in the insurance sector.  Wednesday's
market-wide sell-off did see some profit taking in the insurance
sector index (IUX) but the group has gained it all back and looks
poised for more gains.  Meanwhile ABK has been rock steady above
the $76 level and witnessed almost no selling during yesterday's
market drop.  If the job number is good then ABK should be free
to rally higher.  If the job number tomorrow is bad or the
markets interpret it negatively, then look for ABK to potentially
pull back to the $74-75 region (preferably shares will find
support at $75).  No change to our stop loss.

Picked on February 1 at $74.77
Change since picked:    + 2.13
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      476 thousand
Chart =


---

Danaher Corp - DHR - close: 91.80 cls: +1.67 stop: 87.99

Right on target, DHR bounced on a pull back to the $90.00 level
and it looks like a decent entry point for new bullish positions.
However, shares continue to struggle with a short-term trend of
lower highs and as we mentioned on Tuesday more conservative
traders may want to wait for a move above the $93.00 mark.  No
change to our stop loss at 87.99 but more cautious investors
could probably use a stop just under the 50-dma at $89.
Apparently DHR's presentation at the Lehman Brothers conference
yesterday didn't unveil any significant news.

Picked on January 30 at $91.01
Change since picked:    + 0.79
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =


---

Express Scripts - ESRX - cls: 68.84 chng: -1.56 stop: 65.50

Proving once again that momentum entries are not the way to play,
ESRX reversed sharply on Thursday, dropping back to close near
mild support at $68.75 and more than likely destined for a test
of stronger support at $68.  With the 20-dma now rising to
$67.99, a rebound from that level looks like a very favorable
entry point ahead of another rally back above $70.  There was no
meaningful news to explain today's drop, but it is somewhat
disconcerting that the stock shed more than 2% and closed near
the low of the day, when the rest of the market held up rather
well.  Buying the dips is still the best strategy on ESRX, and it
looks like we could get that opportunity on a bounce tomorrow.
Maintain stops at $65.50, which is below all the shorter-term
moving averages.

Picked on January 13th at    $68.32
Change since picked:          +0.52
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =     1.06 mln
Chart =


---

Genzyme Corp. - GENZ - close: 55.00 change: -0.65 stop: 53.00

Is this deja vu?  Just when it looked like we had a bona fide
breakout over the top of the recent trading range, GENZ is right
back to familiar territory, closing exactly at $55 again.  The
past two days have seen GENZ reverse its breakout in a rather
disconcerting manner, as today's close was the first below the
10-dma ($55.14) since this rally took off in early January.  Of
potentially greater concern is the fact that daily MACD is now
giving a rather strong Sell signal, which is confirmed by a
confirmed Sell signal on the Daily Stochastics.  GENZ should find
strong support near $54, with last ditch support coming in at the
20-dma ($53.52).  We're hesitant to suggest new positions at this
time with the bearish oscillator pattern, but a strong rebound
off of $54 support could work for aggressive traders.  Maintain
stops at $53.

Picked on January 20th at    $53.00
Change since picked:          +2.00
Earnings Date               2/19/04 (unconfirmed)
Average Daily Volume =     2.86 mln
Chart =


---

Henry Schein - HSIC - close: 69.73 chg: -1.13 stop: 68.00

Uh-oh!  We really don't like the close under the $70.00 level
today.  Shares have been flirting with support at $69 but this is
the first close under $70.00 since Jan. 28th.  We suspect HSIC
will test the $69.00 level again or the 50-dma at 68.50.  Today's
close and the bearish tone in HSIC's technical oscillators makes
us cautious and we would be hesitant to open any new bullish
positions unless the stock traded back above 71.70.  The only
headline for HSIC today was news that its Chairman, CEO and
President opened the NASDAQ market this morning in honor of the
American Dental Association's second annual Give Kids a Smile
(sm) Day.  According to the NASDAQ pres release "This program
provides free oral health services to more than one million
underserved children in communities across the country. This
annual one-day initiative enlists more than 14,000 volunteer
dentists and 34,000 dental team members who provide free
educational, preventive and restorative services to children from
low-income families."

Picked on January 22 at $70.65
Change since picked:    - 0.92
Earnings Date         03/04/04 (unconfirmed)
Average Daily Volume:      334 thousand
Chart =


---

Int'l Bus. Machines - IBM - cls: 98.86 chng: -1.33 stop: 95.50

The question of whether Tuesday's kiss of the $100 level did in
fact trigger our IBM play became moot with yesterday's close
above that level.  Sellers were active today though, driving the
stock back down to test the 10-dma ($98.60) before a slight
rebound in the afternoon.  Our focus now turns to securing an
entry on a drop and rebound from the $97-98 support area, taking
advantage of the near-term weakness.  The 20-dma has now moved
above $96 and should serve as ample protection of our $95.50
stop.  Traders looking to enter on strength will now want to see
IBM push through $100.50 (just above yesterday's high) before
taking a position.  The Jobs report in the morning is likely to
determine the fate of the market (and IBM as well) heading into
the weekend.  A sharp dip at the open is likely to get bought,
and that would be the recipe for a solid entry on IBM near that
$97-98 support zone.

Picked on February 1st at    $99.23
Change since picked:          -0.37
Earnings Date               4/15/04 (unconfirmed)
Average Daily Volume =     5.53 mln
Chart =


---

Inamed Corp - IMDC - close: 51.26 chg: +1.10 stop: 48.00

Did you get it?  IMDC offered traders another entry point in the
$49.50-50.00 range and they bought the dip.  Actually, the low
today was $49.63, effectively a bounce off the 49.60 level, which
happens to be the top of the Jan. 28th gap higher.  Usually the
top and bottom edges of a gap tend to act as support or
resistance depending on what direction the stock is approaching
it from.  IMDC still looks attractive here and shares closed near
their high for the day, which is bullish for tomorrow.

Picked on February 01 at $51.54
Change since picked:     + 0.28
Earnings Date          02/24/04 (unconfirmed)
Average Daily Volume:       682 thousand
Chart =


---

Teva Pharmaceutical - TEVA - cls: 64.47 chng: -0.75 stop: 61.00

Following the strong breakout earlier in the week, it was only a
matter of time until TEVA ran into some profit taking.
Considering that the sideways consolidation in the $61.50-63.00
area is midway between the launch point down near $58.50 and
today's highs just below $66, it would be natural to expect a
near-term pullback from the site of today's highs.  Despite the
sharp dropoff, there were plenty of bulls willing to buy the dip,
and TEVA close well off its lows in the $63.50 area.  Today's dip
wasn't quite enough to call a solid entry point, as we're looking
for a pullback into the $62-63 area for that setup.  As noted on
our initial writeup on Tuesday, our preference for entries was to
wait for a pullback precisely because of the likelihood of such a
pullback as seen today.  Look for a dip back to support and the
beginning of a rebound before entry.  Maintain stops at $61,
which is now just under the 20-dma ($61.04).

Picked on February 3rd at    $64.66
Change since picked:          -0.19
Earnings Date               2/17/04 (unconfirmed)
Average Daily Volume =     2.60 mln
Chart =



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

None


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

Avid Technology - AVID - close: 43.00 chg: +1.07 stop: 46.17

AVID fell out of its inside day yesterday and opened our new put
play when shares traded below $42.87.  The stock closed at its
low for the day on Wednesday and shares looked pretty weak but
were overdue for an oversold bounce.  That bounce happened today.
AVID rebounded to touch the $44.42 level before rolling over
again in the last 90 minutes of trading.  What is significant is
that shares have found new selling pressure in the 44.40-44.50
region for 2 1/2 days in a row.  We're going to keep our stop
loss at $46.17 but more conservative trades might consider using
the 200-dma at near $45.15 as a guide.

Picked on February 04 at $42.87
Change since picked:     + 0.13
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       612 thousand
Chart =


---

Eng. Support Sys. - EASI - cls: 45.75 chng: -1.90 stop:
50.50*new*

Now that's what we've been waiting for!  EASI finally cracked
below our $48 trigger yesterday and as expected, that breakdown
was significant.  Of course, there were still some stubborn dip
buyers that bought the initial drop yesterday, but they couldn't
get price back over $48 by the close.  The real follow-through
occurred today, with one last shot at $48 (now resistance) being
rejected and EASI falling nearly 4% on very strong volume.
Recall that we were looking for the first pause after the
breakdown to be seen near the $45 support level and EASI isn't
far above that market now.  The potential exists for a near-term
rebound, but given the heavy selling volume the past 2 days, that
rebound should be short-lived and should deliver another entry
point on a rollover below the 100-dma (currently $48.60).  A
continued break below $45 can be used for momentum entries, as we
could see the stock fall quickly to strong support near $40.
We're recommending aggressive exits on a test of $40, as EASI
should find strong enough buying interest at that level to
produce a sizable bounce.  Lower stops to $50.50 tonight, which
is just above the 20-dma ($50.45).

Picked on February 1st at     $50.00
Change since picked:           -4.25
Earnings Date                3/09/04 (unconfirmed)
Average Daily Volume =         378 K
Chart =


---

QLogic Corp. - QLGC - close: 43.47 change: -0.10 stop: 46.00*new*

Despite a lack of excitement from our QLGC play, we certainly
aren't disappointed by the way it has been trading.  The
consistent pattern of lower highs and lower lows continues, as
the stock trends lower in its short-term descending channel.  The
bounce earlier in the week topped out just above $44, and well
below both the 10-dma ($44.61) and the top of the channel
(currently $44.30).  With another lower high in place, now we
want to see the stock break the low from earlier in the week
($42.56) to confirm the bearish trend is still intact and strong.
Failed rebounds below the top of the channel still look good for
new entries, and we would continue to avoid entries into further
weakness due to the propensity for near-term bounces.  Lower
stops to $46, just above the top of the rebound from late last
week.

Picked on January 22nd at    $45.25
Change since picked:          -1.78
Earnings Date               4/14/04 (unconfirmed)
Average Daily Volume =     3.96 mln
Chart =



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

Capital One Fin. - COF - close: 69.65 change: -0.92 stop: 72.50

Company Description:
As one of the top 10 credit card issuers in the U.S., Capital
One's secret weapon is its vast databases.  The company uses this
data to match a potential Visa or MasterCard customer to any one
of its thousands of cards, varying in annual percentage rates,
credit limits, finance charges and fees.  Ranging from platinum
and gold cards for preferred customers to secured and unsecured
cards for customers with poor credit histories, the company has a
credit card for just about anyone.  The company also sells
wireless phone services, mortgage services, and consumer lending
products.

Why we like it:
Enjoying a strong rally up to just eclipse its all-time highs
late last month, shares of COF are starting to feel the pull of
gravity once again.  The initial drop from its highs near $74
paused near $69, and after a feeble rebound attempt, the stock
fell back to test that near-term support at $69 on Thursday.  The
20-dma ($69.19) helped to reinforce that support near the end of
the day, but if it breaks, COF looks destined for a drop to at
least $65 and possibly the 50-dma ($63.37).  At the same time,
the Banking index (BKX.X) has dropped back from its all-time
highs above $1000 and is just holding onto support at the $980
level.  If that support gives way, the BKX should drop first to
its 50-dma near $969 and then stronger support at $950.

Of course, with the PNF charts for both COF and the BKX strongly
bullish, this is simply a play on the expectation for some much
needed profit taking down to strong support.  We are not
anticipating a major breakdown.  We'll use a trigger at $69.00,
just under today's low and use an initial stop at $72.50, just
above the intraday highs from earlier in the week.  Our initial
target will be for a drop back to the $65 support, with the
potential for a dip as low as the 50-dma.  The best approach for
entry will be on the initial breakdown, although more patient
traders may get a shot at a better entry on a subsequent rebound
and failure below what should be solid resistance in the $70-71
area.  If entering on weakness, be sure to confirm sector
weakness as well, with the BKX breaking its $980 support.

Suggested Options:
Aggressive short-term traders can use the February 70 Put, while
those with a more conservative approach will want to use the
March 70 put.  Aggressive traders looking for more insulation
against time decay can use the March 65 Put. Our preferred option
is the March 65 strike.

BUY PUT FEB-70 COF-NN OI=6591 at $2.20 SL=1.00
BUY PUT MAR-70 COF-ON OI=2824 at $3.70 SL=2.25
BUY PUT MAR-65*COF-OM OI=6376 at $1.75 SL=0.90

Annotated Chart of COF:



Picked on February 5th at     $69.65
Change since picked:           +0.00
Earnings Date                1/21/04 (unconfirmed)
Average Daily Volume =      2.13 mln
Chart =



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**********

Please read our disclaimer at:
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Contact Support
The Option Investor Newsletter                 Thursday 02-05-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: A BIG watch list for Friday!
Traders Corner: Structure Your Trading To Hang Onto Your Profits


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

A BIG watch list for Friday!
___________________________________________________________________

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.
___________________________________________________________________


LM Ericsson Telephone Co - ERICY - close: 23.70 change: +1.17

WHAT TO WATCH:  After nearly four weeks in a sideways
consolidation shares of ERICY are moving again.  The breakout
above the $23.00 level today was sparked by an upgrade from Bear
Stearns.  The analyst raised their price target on ERICY from $19
to $27 on expectations for a strong quarter.  ERICY announces
earnings tomorrow before the opening bell.

Chart=


---

Amgen Inc - AMGN - close: 64.55 change: -0.81

WHAT TO WATCH:  AMGN may be worth watching here.  A couple of
weeks ago shares broke out above its 200-dma and the $65.00
level.  It then spent a few days consolidating above the 200-dma
before leaping higher again on Monday.  We've since seen it pull
back to support at the 200-dma.  Now the question is what
direction does it move next?  Below the 200-dma is even more
support.  However, the recent highs near $66.50 are right at
point & figure chart resistance.  A breakout on its P&F chart
could be the start of its next big move.

Chart=


---

Borg Warner - BWA - close: 92.38 change: +0.98

WHAT TO WATCH:  BWA announced earnings today that beat the street
by 6 cents and surpassed revenue estimates.  The company also
announced a 2-for-1 stock split.  The bounce today may be an
entry point for another rally attempt toward the $100 level, or
at least the current highs above $98.  However, watch for
possible resistance in the $94.00 region.

Chart=


---

St. Jude Medical - STJ - close: 72.94 change: +1.53

WHAT TO WATCH:  Up, up and away!  STJ looks almost bulletproof.
The stock soared in late January on a very strong earnings
report.  The recent market volatility has not affected shares,
which just churned sideways.  News of Guidant filing a patent
infringement lawsuit yesterday didn't phase the stock at all.
This morning's weakness on the Medtronic revenue warning was
completely regained and more with STJ hitting a new all-time
high.  We'd watch it for any dip back toward $70 as a potential
entry point.

Chart=


---

American Intl. Group Inc. - AIG - close: 71.33 change: +1.18

WHAT TO WATCH:  The IUX insurance sector has been exceptionally
strongly lately.  The market-wide sell-off did see some profit
taking in the group yesterday but today's rebound gained it all
back and more.  Shares of AIG, one of the biggest players in the
property and casualty niche, have rebounded from a pull back to
the $70.00 level.  Nimble traders might want to consider bullish
positions here and exit ahead of its February 11th earnings
report.

Chart=


---

Corning Inc - GLW - close: 11.82 change: -0.17

WHAT TO WATCH:  GLW rode the early January frenzy for networking
stocks to new highs and hit the $14.00 level before selling off.
Now that investors are taking some money off the table GLW is
breaking down through the $12.00 mark.  The company recently
announced a $600 million investment into its LCD glass screen
business, which they expect to grow 30%-50% over the next few
years.  Keep an eye out for any pull back to the $11.00 or 11.50
levels.  The stock has a long-term rising trendline that has been
rock-solid support for months and we want to buy the bounce.

Chart=


---


PACCAR Inc - PCAR - close: 83.11 change: +0.71

WHAT TO WATCH:  It's been a good week for shares of PCAR. The
company announced earnings on Monday that beat the estimates by
10 cents.  The company also announced a 3-for-2 stock split with
a short-time frame before its payable date.  Together (the
earnings and split) have sparked a rally from the $79 region to
the current level at $83.00 above its simple 50-dma.  We like the
stock and a move above $84 may be a good trigger for a potential
run back toward the $90 level.  However, its split is due to take
place on Feb. 6th (that's tomorrow).  Sometimes a stock will
suffer some post-split depression, sometimes it won't.  Assuming
the markets don't gap up or down then PCAR should open near the
$55 level.  That $90 target would become $60 on a post-split
basis.

Chart=


---

Diamonds - DIA - close: $105.13 change: +0.34

WHAT TO WATCH:  Diamonds are a way for investors to trade the Dow
Jones Industrials like a stock.  The DJIA has been churning
sideways the last few days because investors are nervous over the
non-farm payrolls report tomorrow morning.  We're expecting a big
move one way or the other based on the jobs number.

Chart=



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

CB $72.51 +1.91 - We really like shares of CB here.  The stock
looks strong and is hitting new relative highs on decent volume.

DOW $41.91 +0.66 - DOW might be a play on a move above the $42.50
mark.  Its MACD and other technicals are turning bullish.

CAT $76.32 +0.42 - CAT got whacked after its earnings report and
the threat of rising interest rates didn't sit well with traders.
Now shares have pulled back toward the $75 level.  This is a
crucial pivot point and depending on the jobs report we could see
a move to $70 or $80 pretty soon.

RNT $24.25 +1.19 - RNT has broken out above resistance at $24.00
to new all-time highs after two weeks of consolidation.

XL $79.90 +1.56 - XL is another insurance stock we're bullish on
with a suggested trigger to go long at $80.75.  Unfortunately,
the company has earnings on Feb. 10th and we don't want to hold
over the announcement.


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Structure Your Trading To Hang Onto Your Profits
By Mike Parnos, Investing With Attitude

Janet Jackson and I have something in common.  We both have had a
wardrobe malfunction.  I lost my shirt in the market.  While my
financial nipples were exposed for the world to see, and, for some
reason, it didn’t make headlines.  It was the most valuable lesson
I’ve ever learned.  There are times in life when you learn what TO
do by learning what NOT to do.

Janet Jackson learned she should keep certain body parts covered
and I learned to keep my options covered – both valuable lessons.
Perhaps Janet and I should get together and commiserate . . .

Getting back to the world at hand, we’re going to continue our
discussion of tax strategies for traders.   OK, so this isn’t as
interesting as reading about trading strategies, but this tax
stuff is stuff you need to know.  Or, at least you need to make
sure the people who are preparing your taxes know it.
_____________________________________________________________

QUESTION:  What is the best structure for tax savings?
ANSWER: You have three options. One is to keep filing your Form
1040 (U.S. Individual Tax Return) year after year. That is the
most expensive solution and unfortunately, that is what most
people do.

Next, you could try to file as a "trader" and deduct your business
expenses on Schedule C of your Form 1040. This is risky and does
not offer you any income tax strategies, so we advise you to stay
away from this option.

The third strategy is to place your trading capital in a legal
entity. There are various entities that may be appropriate,
depending on your situation. Your main choices are the c-
corporation, the flow-thru entities such as the limited liability
company (LLC) and the limited partnership, and a combination of a
c-corporation and a flow-thru entity.

The following is an explanation of the corporation - LLC strategy
for active traders. This strategy can allow you to legally write-
off your computers, home office equipment, all educational
expenses, and a large percentage of meals, entertainment and
travel. You will learn how to run your investment activities as a
qualified business, and how you can grant yourself all the legal
perks, benefits, tax breaks, and tax deductions afforded to large
companies.

The Limitations of Filing a 1040 Tax Return as an Investor
As you probably know, when you file your Form 1040 tax return,
your ability to deduct expenses related to your investment
activities is extremely limited. Certain expenses are deductible,
but these itemized deductions are subject to the 2% of adjusted
gross income limitation. Additionally, deductions for investment
seminars and home offices are categorically disallowed.

Another limitation affecting more and more investors is the Wash
Sale rule. This rule prevents you from realizing losses on
securities sales if you are in basically the same financial
position in a 61-day window of time. The goal of the IRS is to
prevent you from selling a position simply to record the loss, and
then immediately buying back the stock at a lower basis price.
Unfortunately, with active trading being more the norm,
individuals often find themselves moving in and out of the same
stock within the same 61-day window.

One benefit of filing a Form 1040 tax return is the capital gain
treatment of your long-term stock positions. If you hold your
securities for 12 months or longer you can lower your capital
gains tax bracket to as low as 10% or 20%.

In conclusion, if you work at a full-time job and are realizing
capital gains in the stock market, you do not have any powerful
methods for offsetting your tax liabilities. In fact, all of the
expenses incurred in learning how to grow and manage your capital
are almost entirely non-deductible. But what if there was a way to
make your investment activities into a business? What if you
became a qualified money manager in your part-time? Do you think
that you might receive a preferential tax treatment by the IRS?
Let's see:

Filing as "Trader" on Form 1040 Tax Return  tax breaks but risky
This tax strategy boils down to this: You convert your investment
activities into a trading business. Once your investing is
recognized as a business, you are able to deduct any ordinary and
necessary business expenses. What does it take to form a trading
business? The Internal Revenue Code is conspicuously quiet about
how to qualify as a trading business. So, the burden has been
placed on brave individuals who filed their 1040 tax returns and
attempted to establish themselves as "traders" in order to write-
off their business expenses.

Most of these individuals were slaughtered in the tax courts. In
case after case, the individuals were rebuked by the courts. The
net effect of the rulings is that it is nearly impossible to
qualify as a trader. To qualify, you would most likely have to be
trading full-time, hold your positions for less than a day, and
trade a large amount almost every business day throughout the
year. In essence, the court has said, "If you are not on the floor
of the exchange, or holed up in a trading room, you do not
qualify."

Some CPAs have been very active in promoting "trader status"
filings. If you look at the actual text from the court cases, you
will agree that attempting to establish your trading business as
an individual trader on your personal Form 1040 tax return is a
risky proposition and can lead to sleepless nights worrying about
a possible audit. The bottom line is that while a very small
portion of active traders can realize substantial tax savings by
filing as a "trader", a majority of investors do not qualify and
need an alternative strategy.

The Complete Solution: Placing Trading Capital in an Entity
Structure
Instead of attempting the Herculean task of qualifying as a
"trader" on your personal return, there is a method of qualifying
that is automatic, trouble-free, and positively overflowing with
powerful tax benefits. This strategy is what business greats like
Warren Buffet, Michael Dell, and Michael Bloomberg, along with
tens on thousands of others, have chosen for their investment
capital.

Advantages of Using a Corporation
One of the most exciting things about using a corporation is the
sheer amount of tax deductions and perks that are available to
corporate owners and company employees. Congress has created tax
laws and special exemptions for corporations. It is the lobbyists
of the major corporations that have paved the way for you. Now,
you can own your own corporation and be able to write-off all
"ordinary and necessary" business expenses, fully deduct the costs
of attending board meetings that are held in vacation areas,
write-off all medical expenses with no limitations, contribute up
to $40,000 to your own pension plan, and much much more.

For individuals that are generating a large amount of excess
revenue, the corporation structure allows you to start-up
additional businesses with the expenses of the new business
offsetting the income from the trading business. Another great
benefit of the corporate entity is that it is a perpetual entity.
Many individuals choose to retain the controlling interest in the
corporation, and gift the non-controlling stock to their
beneficiaries early in the growth of the business. That way, all
future growth occurs in the estate of the beneficiaries, so that
when you pass away, your beneficiaries do not need to sell off
your business simply to pay the taxes. All they would be receiving
is the small amount of controlling stock.

Taking Action
If you are a part-time trader, you have created a situation where
you can take advantage of major tax strategies usually reserved
for individuals with full-time businesses. It is simply a matter
of getting started. We are the experts in this arena. We can look
at your situation and show you how the entity structure would work
in your situation.

The Trader Tax Experts
Once again, the answers have been provided by the tax experts at
TradersAccounting.com.  All questions and/or clarifications should
be directed to their website.
______________________________________________________________

FEBRUARY CPTI POSITIONS

Position #1 -- OEX – Credit Spread Boogie – 559.61
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.

We’re below our 565 short strike, but there is still farther to go
to convince us that the trend has actually changed and plenty of
time to make an adjustment.

Position #2 – MNX (mini NDX index) – Iron Condor – 146.50
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.

This position has fallen through the short $150 strike price, but
because of the relatively low risk, we’re going to see if it
bounces back up off of the 50-day moving average.  There are still
two weeks left.

Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $96.23
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) - $99.12
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 -- $36.47
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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