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Daily Newsletter, Thursday, 02/12/2004

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The Option Investor Newsletter                Thursday 02-12-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Thank You Mr. Greenspan
Futures Markets: Running the Clock
Index Trader Wrap: Bulls lacked aggression
Market Sentiment: Investors Take A Breath


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-12-2004           High     Low     Volume Advance/Decline
DJIA    10694.07 - 43.60 10735.29 10688.36 1.86 bln   1357/1848
NASDAQ   2073.61 - 16.10  2091.22  2072.06 1.94 bln   1291/1872
S&P 100   569.43 -  2.96   572.39   568.97   Totals   2648/3720
S&P 500  1152.11 -  5.65  1157.76  1151.44
W5000   11239.00 - 54.40 11293.42 11234.38
RUS 2000  592.75 -  4.32   597.07   592.13
DJ TRANS 2950.33 -  1.60  2960.52  2936.59
VIX        15.31 -  0.08    15.72    15.23
VXO (VIX-O)14.90 +  0.02    15.46    14.73
VXN        23.53 +  0.00    23.88    23.00
Total Volume 4,074M
Total UpVol  1,517M
Total DnVol  2,386M
Total Adv  3041
Total Dcl  4195
52wk Highs  708
52wk Lows     5
TRIN       0.93
NAZTRIN    1.08
PUT/CALL   0.55
************************************************************

Thank You Mr. Greenspan

After sending the Dow to a new two year high on Wednesday the
master of disaster carefully avoided any comments today that
would have reversed that gain. The positive comments about
GDP growth, job growth and the Fed's patience comforted bulls
and despite some minor profit taking today the markets held
those gains.

Dow Chart - Daily


Nasdaq Chart - Daily



Even negative Jobless Claims failed to put the skids on the
gains from Wednesday. Claims rose to 363,000 for this week
and the prior week was revised up to 357,000. Even a two-week
rebound over 350K failed to spoil the party. Continuing claims
fell another 23,000 to 3.083 million. Blame it on the weather
was the general analyst assumption as the four-week average
rose back to the 350,000 level. I am surprised there was not
a bigger reaction to the two week jump especially when
Greenspan himself said there was little evidence of hiring.
350K is the line in the sand below which job growth appears
and above that level we historically tend to see job growth
decrease.

Retail Sales fell -0.3% in January and far below expectations
for growth of +0.2%. A larger than expected decline in auto
sales was targeted as the culprit. I assume you could blame
that on the weather as well since car buyers seldom brave
blizzards to test drive new cars. The number ex-autos soared
to +0.9% with apparel, grocery and sporting goods stores
leading the gains. Building materials dropped -0.9%, again
probably due to the weather. Electronics only rose +0.1% and
furniture fell -0.9%.

Business Inventories rose +0.3% in December and inline with
estimates but an increase in sales pushed the inventory to
sales ratio to another record low of 1.34. Retailers showed
a modest increase in inventory but manufacturers remained
flat. In fact manufacturing inventories have declined for
three consecutive quarters. Everyone keeps pointing out the
record low levels as a sign there is a massive rebuild cycle
in our future but it continually fails to appear. This rebuild
cycle should add significantly to the GDP for Q1 as retailers
restock from the holiday sales.

The Greenspan relief rally on Wednesday shook off the minor
economic glitches above and the Dow clung to the 10700 level
with a grip of steel. The Nasdaq did not participate in the
Wednesday gains to the same extent as the Dow. The Nasdaq
gave back those meager gains today but held above 2075
support until earnings fears prompted a late day down tick.

Those earnings fears did not come to pass with Dell beating
estimates by a penny, ADI beat by two cents and NVDA beat
by three. Dell traded up in after hours and NVDA got killed.
Dell was the real threat. There was a concern that Dell had
felt the HPQ heat in the 4Q and had to cut margins to the
bone to sell computers. They were afraid that Dell could
report inline, show margin shrinkage or even guide lower
going forward. None of that came to pass. Dell was pleased
with their results, but then they normally are. Dell said
IT spending was increasing although at a slow and steady
pace.

Ironically Dell traded up in after hours despite a relatively
subdued conference call. Dell said that despite the steady
rise in IT spending they were not seeing any growth from the
large companies. The spending was coming from small to
medium size businesses with growth slowing as the size of
the companies grew larger. Revenue was inline with guidance
and shipments rose +25%. Dell also said January was strong
and they were refusing to discount prices further in their
battle with HPQ. Notebook sales which had been fueling
profits over the last two quarters were slowing and lower
priced computers were seeing stronger sales in 2004.

Dell said sales would decline -3% for Q1 due to seasonal
patterns. HPQ is hurting Dell and sometimes selling at a
loss to get the business. The battle for bragging rights
for first place has been tough and the lead tends to shift
quarter by quarter. Dell was quick to point out that its
printer business grew by +100% and they were continuing to
offer new models to compete with HPQ. Based on the flat tone
of the call and the flat guidance I am surprised that they
traded higher after hours. I suspect it was a relief rally
that they did not do worse as the whisper numbers had
suggested. Dell had traded at a six month low of $31.75
just last week.

Nvidia on the other hand felt the wrath of traders despite
beating estimates by +3 cents. The win was helped by a low
tax rate and a reduction in liabilities for tax contingencies.
Earnings were less than half of the prior 4Q on basically
the same revenue. NVDA also said sales of X-Box chips to
Microsoft had declined -$90 million and current sales would
be flat to down -5%. This was not really a surprise as most
sales come in the 3Q for units sold over the holidays. The
drop was slightly more than had been forecast. NVDA was
down to $21.90 in late trading.

On the flip side of the earnings coin was ADI, which posted
earnings that were nearly twice the same period a year ago.
ADI posted 30 cents for the 4Q compared to only 16 cents
from the prior year. Revenues were up and gross margins
rose to a whopping 57.1%. They also declared a dividend of
four cents. They guided analysts to 34-35 cents for Q1 and
well over the prior estimates of 32 cents. ADI shares jumped
over $2 in after hours trading.

In related news INTC actually dropped -25 cents despite
announcing a discovery that could accelerate data transfer
inside a PC by as much as 50 times the present rate. The
discovery is a way to pulse light beams through silicon to
represent the on/off state of a common bit of information.
By using different colors of light in the same beam they
anticipate being able to increase the transfer rate even
more. It will be sometime before this discovery makes its
way into real production but the path is clear. During
Dell's earnings they also alluded to the 64bit AMD chip
but suggested they would wait for the Intel offering that
is expected shortly. The problem is not the chip but the
software that runs on it. Until the software catches up
there is no rush for anyone to jump ship to the AMD chip.
Intel obviously knows this and are taking their time.

The biggest news of the afternoon was a sudden drop in
Imclone stock just before the stock was halted for news
pending. IMCL was trading just over $42 at 1:25 when the
stock suddenly dropped to $33.50 in a single tick with
volume indicated at over 600,000 shares. Several seconds
later the stock was halted news pending. The news was a
successful approval by the FDA of Erbitux. The IMCL drop
was explored by Nasdaq and the stock did not open again
for trading until 4:20. It closed the after hours session
back over $44.00. No answer for the drop was ever given
and whoever took the other side of that 600,000 share
sale should be a happy camper tonight. The FDA originally
declined to approve Erbitux and that led to the current
Martha Stewart trial and prison for Sam Waksal. IMCL was
trading just over $60 when that first denial was made.

The second day of testimony by Greenspan concluded without
any problems and traders breathed a sigh of relief. The
market fell slightly on the conclusion suggesting there
was a "sell the lack of news" event. The trading day was
actually very boring. We opened down on profit taking on
the weak economic news but the Dow then traded in a very
narrow 35 point range the rest of the day. 10700 became
the battle ground and traders appeared content to let
time expire on the clock rather than press the battle.

The Nasdaq held 2075 until a minor sell program in the
last ten minutes pushed the index to close at 2073. The
techs have not been as strong as the Dow but are holding
their own. The close at 2075 resistance, now support, and
the bump in the futures after the close could suggest
there are further gains ahead but it is very tough to
draw any kind of conclusions at these levels. Bullish
sentiment is still very strong but we are in the period
where historical consolidation occurs. We need to hold
these levels for at least another week until the April
earnings cycle begins with mid quarter updates.

Fueling this earnings cycle will be a very strong surge
in tax refunds and the beginning of the spring home buying
cycle. Greenspan clearly indicated that the Fed was planning
on being patient about raising rates. He also suggested the
recovery was still on track despite the lack of jobs.
This is the green light for equities and he removed any
suggestion of a change in conditions for at least the
next 90 days.

The lack of any material sell off after the Wednesday
gains shows that the bullish sentiment is alive and well
despite the two year highs. The key for Friday will be
the Nasdaq. If the Dell and ADI earnings based on a broad
customer base can overpower the disappointment from NVDA
which caters to a niche market then we should be in good
shape. The Nasdaq pulled back to its 50 dma last week and
the rebound from that level has yet to catch fire. After
four days we are still trading at the level reached on
that initial rebound. The Nasdaq needs to at least hold
its ground on Friday. We need to get above the 2080 level
and notch another higher high to give traders confidence
the rebound is going to stick. We may need a catalyst to
push us higher but we are still in dip buying mode until
something changes.

Tomorrow is Friday the 13th and Monday is a holiday. The
only economic report tomorrow that could move the market
is the Consumer Sentiment. The consensus is 104.9, up
from 103.8 in the last reading. As I reported last week
there was an AP sentiment survey for late January that
dropped substantially to 91.7 from 106.3. Should the
Michigan Survey tomorrow show any significant drop traders
might think twice before making big bets before the long
weekend. Flights were cancelled again today for terrorist
reasons so there is event risk to consider.

Lest you think market historians have nothing left to
compute you might be interested to know that on this Friday
in 2003 the Dow showed the first gain in twelve years. Yes,
after eleven straight years of declines the string was
broken. Wonder what it is about President's Day that
prompted the selling? Could it be they needed money for
Valentines presents? Yes, guys, there is only one shopping
day left until Valentines. Get off the couch and head for
the mall.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Running the Clock
Jonathan Levinson

It was a quiet day for the indices with the US Dollar, the CRB
and gold advancing, while equities and treasuries declined.

Daily Pivots (generated with a pivot algorithm and unverified):


Note regarding pivot matrix:  The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula.  They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm.  Do not think of them as market "calls"
or predictions.  Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions.  Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.


Chart of the US Dollar Index


The US Dollar Index added some green today as it continued its 24
hour+ drift higher.  There was little apparent reaction to
Greenspan's senate testimony, which was one of the most
interesting discussions of the world's most pressing
macroeconomic issues I've yet heard.  Without the grandstanding
and kowtowing that characterized much of the Congressional
questions yesterday, a thoughtful, considered dialogue
transpired.  Once again, the headlines did a terrible job of
transmitting the substance of the questions and answers, and it
was well worth the time to listen to the exchange between the
Senate and the Fed chairman.  The Commodities Index, the CRB rose
despite the admittedly corrective advance in the dollar, adding
1.59 to close at 264.65, let by natural gas, cotton and copper
futures.


Daily chart of April gold


April gold was strong throughout the session, reaching a high of
414.60 and spending most of the day above 413.  The daily cycle
upphase strengthened as gold chipped away at 414's sellers.
Bollinger resistance is just above at 417.60, which lines up with
the confluence running to 420.  Support is at 408, followed by
402.  For the day, April gold added .70 to close at 413 on volume
of 1,019 contracts, with a day low of 410.40.  A late-day selloff
took the miners to their lows, with XAU dropping 1.7% to close
at 102.54 and HUI -1.39% to 235.37.

Note that, after some discussion in the Futures Monitor today, I
will be following silver futures throughout the day and reporting
my observations there.  If anyone would prefer to see coverage of
silver instead of gold on an occasional basis (or not), just send
me an email to jlevinson@OptionInvestor.com and let me know.


Daily chart of the ten year note yield


Bonds advanced in the morning and weakened in the afternoon,
going out near their lows of the day.  Ten year note yields (TNX)
finished higher by 3.7 basis points at 4.058%, a .92% gain on the
day.  The 10 year treasury auction generated a bid to cover ratio
of 2.0, low despite large participation from foreign central
banks.  Once again, today's rise in the TNX is counter to the
ongoing oscillator downphase, but the intraday reversal left a
bullish doji hammer for the daily print.  This is a reversal
candle, and printed a higher low over yesterday's wide range.
Support at 4% remains firm, and if it fails to crack, we might be
looking at an early end to the current yield downphase.


Daily NQ candles


The NQ declined .79% or 12 to close at 1500.50 today.  It was a
virtually inscrutable day, the equivalent of heavy fog, and our
indicators worked perfectly in deciphering the chop.  The 30
minute cycle downphase (see chart below) was juxtaposed with the
daily cycle upphase still in progress, resulting in what felt
like a corrective drift lower.  There were no interesting selling
climaxes, just a sideways down move that bored index traders into
focusing on the TASR squeeze and the IMCL drama.  The doji candle
marked the second rejection below 1520 with an intraday high of
1517.50.  Like today's print on the TNX, the NQ's move today
looks like a countertrend correction, but a sustained move below
1492 support would change that.  For the moment, resistance
remains at 1418-1420, support at 1492, followed by 1480-82.


30 minute 20 day chart of the NQ


The 30 minute NQ chart shows the surprising lack of follow
through on the downphase we discussed last night.  The bearish
oscillator divergence delivered very little bang, and bulls have
done an excellent job running the clock on bears hoping for an
impulsive push through the daily cycle upphase support.  It
hasn't occurred, and a weak downphase is usually prelude to a
strong upphase to follow.  In this case, the cycle oscillator is
still pointed south, but it's approaching oversold territory and
doesn't usually trend.  A followthrough push is expected
tomorrow, but given today's lack of action, I'd be surprised if
we even see 1492.  Resistance is at 1508, 1512 and 1518.


Daily ES candles


ES fell 4 points or .35% to close at 1151.25.  The very shallow
pullback so close beneath the rally high looks impressively
bullish.  The small correction today respects the steep uptrend
this week, and even with today's negative prints, the Macd gave
us a confirming bullish cross.  Note that this has not occurred
on the NQ.  If anything, the main problem with this picture is
that it's too bullish, as evidenced by the put to call ratio,
which stayed south of .50 for most of the day and finished at
54, showing an imbalance to the call side.  It's always
brightest before the dusk, and that (along with the possible
double top forming below 1160) appears to be the only bearish
thing I see on the daily ES chart.


20 day 30 minute chart of the ES


As on the NQ, the 30 minute ES shows the bulls running the clock
for the 30 minute cycle downphase.  1149 could coincide with the
cycle bottom, and if so, the ensuing upphase will be in gear with
the ongoing daily cycle upphase.  The combination of synchronous
short, 30 minute and daily cycle upphases bouncing from higher
rising trendline support...  you get the idea.  Support below
1149 is 1146 and then 1143, while resistsance is above at 1158.

150-tick ES


The lackluster action today has chopped up the 150-tick short
cycle oscillators, with the short cycle (red) channel drifting
aimlessly in the middle of the downsloping 30 minute (orange)
channel.  The oscillators are closer to a bottom than to a top on
this timeframe, so I'm leaning toward a bounce, but on this
timeframe it could break in either direction.  I've left 2 days
worth of data to illustrate the possibility of either a bear flag
or a rough head and shoulders top forming.


Daily YM candles


YM dropped 16 points or .14% to close at 10687.  It was the
strongest of its peers, and looks the most impervious to gravity.


20 day 30 minute chart of the YM


If the current 30 minute downphase here is not a bull flag, then
it's an excellent distribution fakeout.  Resistance is at 10740,
support 10675.

Today was mostly a throwaway day, with what appear to be
corrective moves in the US Dollar Index, bonds and equities.  A
further extension of these moves tomorrow will indicate that more
is at work, but for the moment, the cycle don't favor that
outcome.  The advance in gold and commodities alongside the US
Dollar Index was rare, as was the decline in the CDN dollar
against the US.  I'm attributing much to the anomaly yet, but
more of the same tomorrow will be more interesting.  See you
there.


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

Bulls lacked aggression

While shares of Taser International (NASDAQ:TASR) $59.60 +19.91%
surged as high as $67.75, bulls seemed less eager to bid stocks
higher in today's trade, with the NASDAQ Composite (COMPX)
2,073.61 -0.76% giving back about 3/4 of yesterday's gains, while
the stronger Dow Industrials ($INDU) 10,694.07 -0.4% gave back
almost 1/2 of yesterday's advance.

In my opinion, TASR's advance over the last two days from the
$43.00 level, can be largely attributed to some very unkind bulls
that have little stock to sell some very short bears, where when
it looks like things might have calmed down for TASR's
bullishness, it erupts like a volcano.

However, there was little sign of aggressive buyers in the tech-
heavy NASDAQ-100 Index (NDX.X) 1,501.34 -0.84%, and while Rambus
(NASDAQ:RMBS) $24.35 -17.75 is not a component of the
Semiconductor Index (SOX.X) 518.78 -1.52%, Noveluss Systems'
(NASDAQ:NVLS) $34.12 +0.03%, and only SOX component to post a
gain by today's close, didn't have the look of aggressive buyers
being present either.

Market Snapshot / Internals - 02/12/04 Close



Market internals at the A/D line just never were able to get
positive in today's trade, but bullish leadership was present at
both the NYSE and NASDAQ NH/NL daily ratios.

We can see from the hourly price changes for the major indices,
that today's trade could be characterized as a "slow bleed"
lower, and volume was rather consistent.  It has me feeling,
based on observation, that buyers just weren't very aggressive on
the heels of yesterday's gains.

While the QQQ did see some early session gains, and had be
thinking that the "beta trade" might have been in play, it simply
didn't pan out, and all be darned if the QQQ didn't close at
$37.25, where little help was found from the Semiconductor Index
(SOX.X) 518.78 -1.52%, which traded a session high of 530.48
after today's 10:00 release of December business inventories,
which rose 0.3% and matched economists' forecast.

Pivot Analysis Matrix



I profiled a day trade in the QQQ today at $37.42 (just below its
monthly pivot, but above some intra-day resistance) when it
looked as if the QQQ might make a recovery from its then session
lows of $37.31, as the Semiconductor Index (SOX.X) had been
sitting on today's (Thursday's) DAILY S1, and had started to rise
from that level.

Evidently I had an old downside alert set on ImClone Systems
(NASDAQ:IMCL) at $33.99 and it was about 12-minutes after QQQ
bullish entry that this downside alert went off, the QQQ reversed
from $37.45, fell to $37.30 (stopped me out at $37.31), then IMCL
was halted for news pending, the QQQ bounced back to a high of
$37.48 when it was learned that IMCL received FDA approval for
its Erbitux drug, thing's calmed down, and the QQQ closed out at
its lows of the day.

That was today's "excitement" if we want to call it that, and
through it all, buyers didn't show much sign of aggressiveness in
today's trade.

Semiconductor Index (SOX.X) Chart - 5-point box



I wanted to take a quick look at the Semiconductor Index (SOX.X)
on a 5-point box size point and figure chart, with MONTHLY levels
overlaid.  I make note that Dorsey Wright & Associates'
Semiconductor Bullish % (BPSEMI) recent turned back into "bear
confirmed" status from "bear correction" status.  It was in early
December (red C) that this sector bullish % first turned "bear
confirmed" status, and while the recent rebound from 495 (just
above MONTHLY S1) has been welcomed by bulls, the above supply
demand chart does give focus that the 490 level is an important
near-term level of support.

I would have to describe the SOX as a sector to be viewing as
rather "defensive" right now, where this rebound is most likely
going to find sellers, where only aggressive buying, or bulls
with some serious conviction, are going to be able to drive the
sector higher.

This is a statement of the obvious, that only aggressive buyers,
or bulls with conviction that higher prices still exist would be
buyers, but current levels of trade is where we might also expect
some technical selling.

Here's a bar chart I've done some rather basic work on, with
retracement as well as a regression channel from the March lows.
I knew I showed a chart of the SOX in a prior Index Trader wrap,
and now I'm focused!  It was on 01/27/04, in that wrap that we
looked at the SPX chart.  Boom!  The light goes on for tomorrow
as it relates to that wrap

http://members.OptionInvestor.com/Itrader/marketwrap/iw_012704_1.ASP

tomorrows DAILY S1, and the following chart.  Remember... SOX
514!

Semiconductor Index (SOX.X) Chart - Daily Intervals



I give great attention to the SOX in tonight's wrap, as it is a
key technology sector, with some very good levels away from the
major indices for us to monitor and not until tonight does my
attention get drawn to 514, which becomes a level that has shown
up in the past.

While I'm not a big fan of MACD, I think it serves a very good
test with 514 in mind and the SOX back within its BULLISH
regression channel.  Remember, MACD is an oscillator that works
better when TREND is observed.  Some of the best shorts, or
declines I've seen is when MACD falls below zero like it has in
the SOX, then rolls over from there, where PRICE ACTION can
impact the MACD Oscillator.  If looking at the SOX chart, that
rollover might occur with a break below 514.  See how the MACD
histogram bars have now recovered back to zero?

I feel the next couple of sessions could be important for the
SOX, the QQQ, and perhaps the other major indices.

Now... some of the hesitancy I feel in the markets today, or lack
of aggressive buying, might also be represented in the above SOX
chart.

As a technician, the bullish side of me would want to WAIT until
the potential right shoulder of a head/should top pattern was
broken to the upside before acting more bullish.  I would ONLY be
a buyer of the SOX if I (Jeff Bailey) knew for sure that there
was some type of great bullish catalyst about to be presented in
coming days or weeks.  As such, the bullish side of me would be
HESITANT to buy the SOX right here.

Now, I'd become more bearish the SOX, if I saw weakness below
514, but I'd be willing to bet, there are quite a few bears
shorting the SOX right now, as their risk to the upside can be
protected with a stop just above the 535 level.

I think I would also carry this "I would only be more bullish,"
or "I would only be more bearish" type of thinking with the other
major indices, but using the SOX as a good sector to be
monitoring very closely near-term.

Try to put yourself in the shoes of a BULL and a BEAR in the SOX
right now.  I get the feeling that traders are going to want to
at least get another test of the 514 level, to see what type of
buying (bullish buying and short covering from bears that might
feel they've been trapped below).  Almost like placing your hand
on the burner of the stove, to see just how hot is really is.

C'mon... you've done it before!  Even thought the stove burner
wasn't red, you placed your hand on it to see if it was turned on
or not.

Laughing.... I tried to iron out a wet spot on my dress shirt one
time, with my shirt still on.  I knew the iron was hot, but good
gravy I didn't know it was that hot!

The same think to the upside may have taken place this morning at
SOX 530, where the temperature of buyers and sellers was taken.
Obviously that level is hot for resistance right now, and sellers
may be formidable.

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



To say that the SOX could single-handedly pull the broader SPX
lower would be a mistake, but other than profit taking, there
would have been NOTHING technically, like found in the SOX, to
really explain today's selling.  I would try and associate SOX
514 with SPX 1,148.00 to use round numbers.

While SOX 514 appears to me an important level of support, the
SPX MONTHLY support level, after the SPX slipped back below its
MONTHLY R1, would be back lower at 1,142.40.

My thinking here is if the SPX is headed to 1,142.40, then the
SOX isn't going to have held 415.

NASDAQ-100 Index (NDX.X) Chart - Daily Intervals



I'm showing the NDX, not the QQQ tonight only because the NDX is
trading much cleaner, or accurate if you will, relative to the
pivot levels.  While the QQQ traded 7-cents above its WEEKLY R1
today, the NDX didn't challenge didn't trade its WEEKLY R1, and
would have provided a cleaner trade.

I've made some SOX and NDX observations, as it relates to SOX
415, but also not MACD on the NDX, and understand implications of
SOX trade near-term.

Jeff Bailey


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

Investors Take A Breath
- J. Brown

After holding their breath Monday and Tuesday in anticipation of
Alan's appearance before congress investors may have let it all
out at once during Wednesday's big rally.  Today's action looks
like everyone just took a moment to catch their breath while
listening to Greenspan's second Q&A session with the senate.  The
economic data today was not inspiring but we'll get to hear more
tomorrow.  Before the open will be the import/export prices
report and the trade balance numbers.  After the bell the markets
will hear from the Michigan consumer sentiment report.  Currently
economists are estimating a small drop from 103.8 last month to
103.3.

Yet the real catalyst may be Dell's earnings that came out
tonight.  The EPS number beat by a penny while revenues matched
the estimates at $11.51 billion for the quarter.  That alone is
not impressive and one would normally expect profit taking on
this news.  However, we all know that investors have selective
hearing and they might key in on Dell's comments about corporate
demand picking up and their expectation for steady growth in tech
spending this year.  Unfortunately, they countered this positive
outlook by only guiding in-line with current estimates.  Maybe
they anticipated a negative reaction and in an attempt to keep
their stock price up Dell announced a $100 million stock buy back
program for the first quarter and another $100 million for each
quarter in FY05 for a total of $600 million.  Maybe it will work
but I think investors may have been happier if DELL had just
instituted a dividend instead.  How investors interpret this
report will influence direction for tech stocks tomorrow.

Market internals turned negative by the closing bell on Thursday
as declining stocks outpaced advancers 16 to 12 on the NYSE and
18 to 12 on the NASDAQ.  Down volume also outnumbered up volume
with the selling much heavier on the NASDAQ.

Keep an eye on the Dow Transports (TRAN).  This sector has
rallied strongly from its early February low but has stalled
right at resistance in the form of its 50-dma.

Bulls were able to drive the biotech index to another high today
but gains faded by the close.  Its cousin the DRG drug index
started the day in the red and remained there but still managed
to close above its simple 10-dma.

Energy stocks are still showing strength with the OSX oil
services index and the XNG natural gas index stretching their
winning streak to five days in a row.  The OIX has also been
strong but is currently under six-week resistance at the 330
level.

Right now the market leaders are the DFI defense index and the
IUX insurance index, both hitting new highs with a strong trend
behind them.  The RLX retail index isn't far behind after its
recent bullish breakout.

Garnering an honorable mention are the airlines and homebuilders.
The XAL has rebounded from its February low and closed above its
50-dma today.  A number of airlines are starting to slash prices
to drive up spring traffic.  Meanwhile the homebuilders have been
making headway now that Wall Street believes the fed will be
patient before raising rates again.


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

Market Averages

DJIA ($INDU)

52-week High: 10746
52-week Low :  7416
Current     : 10694

Moving Averages:
(Simple)

 10-dma: 10567
 50-dma: 10376
200-dma:  9566



S&P 500 ($SPX)

52-week High: 1158
52-week Low :  788
Current     : 1152

Moving Averages:
(Simple)

 10-dma: 1139
 50-dma: 1112
200-dma: 1029



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1501

Moving Averages:
(Simple)

 10-dma: 1490
 50-dma: 1475
200-dma: 1339



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


The volatility indices are little help today.  The VIX and VXO
closed almost unchanged despite their earlier highs this morning
and the VXN did close unchanged.

CBOE Market Volatility Index (VIX) = 15.31 -0.08
CBOE Mkt Volatility old VIX  (VXO) = 14.90 +0.02
Nasdaq Volatility Index (VXN)      = 26.53 +0.00

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.56        916,360       508,743
Equity Only    0.43        820,594       354,644
OEX            1.83         18,758        34,382
QQQ            1.35         40,042        53,905


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.0    + 1     Bull Confirmed
NASDAQ-100    69.0    - 1     Bear Alert
Dow Indust.   86.7    + 0     Bull Confirmed
S&P 500       88.0    + 1     Bull Confirmed
S&P 100       89.0    + 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: 0.92
10-dma: 0.96
21-dma: 0.97
55-dma: 0.98


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    1192      1175
Decliners    1643      1864

New Highs     347       226
New Lows       10         3

Up Volume    830M      691M
Down Vol.    983M     1068M

Total Vol.  1833M     1848M
M = millions


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

Commitments Of Traders Report: 02/03/04

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

Commercial traders can't seem to make up their mind.  Currently,
they're almost flat with a slight edge to the bears.  Meanwhile
the small traders have grown even less bearish.


Commercials   Long      Short      Net     % Of OI
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%
02/03/04      411,920   414,596    (2,676)   (0.3%)

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
01/13/04      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%
02/03/04      141,465    81,926    59,539    26.7%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02


E-MINI S&P 500

Commercials have become significantly more bearish by upping
their short positions and closing some bullish ones.  Small
traders are still feeling optimistic.


Commercials   Long      Short      Net     % Of OI
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%)
02/03/04      280,519   346,042    (65,523)  (10.5%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
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%
02/03/04     133,293     55,476    77,817    41.2%

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


NASDAQ-100

Commercial traders in the NDX remain in limbo with very
little movement over the last few weeks.  In contrast
small traders have become much more bearish.


Commercials   Long      Short      Net     % of OI
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%
02/03/04       43,600     41,441     2,159    2.5%

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
01/13/04        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%)
02/03/04        8,907    13,729    (4,822)  (21.3%)

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

The shuffling continues for commercial traders in the Dow.
Small traders have become more bearish.


Commercials   Long      Short      Net     % of OI
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%
02/03/04       17,765     9,619    8,146      29.7%

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
01/13/04        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%)
02/03/04        6,352    13,113   (6,761)   (34.7%)

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 02-12-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: IMDC
Dropped Puts: EASI
Call Play Updates: AHC, APOL, ABK, CDWC, DHR, DHI, ESRX, GD, IBM,
                   PD, TEVA
New Calls Plays: ATH
Put Play Updates: AVID
New Put Plays: None


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

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


CALLS:
*****

Inamed Corp - IMDC - close: 49.96 chg: -1.01 stop: 48.00

That's it!  The slow bleed lower for IMDC has finally crossed the
$50.00 mark on a closing basis and we're going to cut our losses
now.  The MACD indicator is rolling over and the stock looks set
on a retest of the 50-dma as support (currently 48.75) if not the
$48.00 level.  IMDC does have earnings expected on Feb. 24th but
there doesn't appear to be much pre-earnings excitement.

Picked on February 01 at $51.54
Change since picked:     - 1.58
Earnings Date          02/24/04 (unconfirmed)
Average Daily Volume:       682 thousand
Chart =



PUTS:
*****

Eng. Support Sys. - EASI - close: 50.66 change: +1.17 stop: 50.00

Bringing this frustrating play to an end this morning, EASI
pushed through our $50 stop and put us out of our misery.  In
hindsight, we can see the stock gave us one quick opportunity for
profit when it dropped to just below $46, but last Friday's broad
market rebound lifted the stock off its lows and it has been
steadily upwards ever since.  As expected, the $48-49 area did
provide some resistance on the return trip, but in the end, the
bulls won.  Clearly EASI is a drop tonight as a failed play.

Picked on February 1st at     $50.00
Change since picked:           -0.66
Earnings Date                3/09/04 (unconfirmed)
Average Daily Volume =         396 K
Chart =



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

Amerada Hess Corp. - AHC - cls: 60.62 chng: +0.13 stop:
57.00*new*

Without even pausing for breath, AHC continued its breakout
yesterday, vaulting through the $60 level and ending very near
its high of the day.  Flexing its muscles again today, the stock
actually managed to post a fractional gain, in spite of the mild
profit taking across much of the broad market.  Of course, it
didn't hurt that the Oil Services sector (OSX.X) finished with a
solid 1.1% gain on the day, which was probably helped by the
strength in Crude Oil prices, once again holding over the $34
level.  The continued strength in AHC after Tuesday's breakout is
very encouraging and shows that the breakout is for real.  A
pullback into the $58-59 area would make a gift of an entry
point.  While there's some potential resistance in the $61-62
area, it doesn't look like AHC should encounter strong resistance
until reaching the $65 level.  That means it should still be safe
to enter the play on a breakout over today's high.  Note that our
stop has been raised to $57 tonight, which is just below 20-dma
($57.66) support.

Picked on February 10th at   $59.53
Change since picked:          +1.09
Earnings Date               1/28/04 (confirmed)
Average Daily Volume =     1.06 mln
Chart =


---

Apollo Group - APOL - close: 78.46 change: -0.30 stop: 73.50

Yesterday's strong market rally gave APOL the boost it needed to
push into a slightly higher orbit, breaking out over the $78
level and despite the weakness today, the stock managed to hold
onto the lion's share of those gains.  While the stock does look
extended here and in need of a bit of consolidation, each time it
gives that appearance, it seems to push just a bit higher.  Look
for a pullback into the $75-76 area to provide a solid entry
point, especially with the 20-dma ($74.90) rising to reinforce
the bottom of that support zone.  Aggressive traders can enter on
breakouts to new highs, but need to beware of the potential for a
profit taking pullback.  We'll maintain our stop at $73.50, which
is just under the 30-dma ($73.64).

Picked on February 1st at    $77.44
Change since picked:          +1.02
Earnings Date               12/18/03 (confirmed)
Average Daily Volume =     1.76 mln
Chart =


---

Ambac Financial Group - ABK - close: 76.35 chg: -0.16 stop: 71.99

We're starting to lose patience with ABK.  The IUX insurance
index has been setting new highs almost daily and we keep waiting
for ABK to play catch up.  Unfortunately, ABK has been stuck in a
sideways consolidation above the $76.00 level.  As suggested
earlier a bounce from $75 still looks buyable but conservative
traders may want to wait for ABK to trade above The $77.50 mark.
In the news ABK's CEO will be presenting at the Merrill Lynch
Global Insurance Investor Conference on February 24th in New
York.

Picked on February 1 at $74.77
Change since picked:    + 1.58
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      476 thousand
Chart =


---

CDW Corp. - CDWC - close: 68.61 change: +0.11 stop: 64.00

We're still waiting for CDWC to give us the go ahead to enter
this pending bullish play.  Recall that we need to see a trade
above resistance at $70.25 in order to consider an entry.  It was
really puzzling yesterday to see the broad market rally, and yet
CDWC unable to capitalize on it.  The stock has spent the past
two days in a tight consolidation pattern, simply continuing the
consolidation patter that began in the middle of January.  Wait
for the breakout before playing and then enter either on the
breakout or a subsequent pullback to $68-69 support, depending on
your trading style.

Picked on February 8th at    $69.13
Change since picked:          -0.52
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     1.37 mln
Chart =


---

Danaher Corp - DHR - close: 94.33 cls: -0.15 stop: 89.50

DHR still appears to be coiling for its next move higher above
resistance at $95.00-95.50.  The stock dipped toward the $92.50
level on Tuesday offering a new entry point but DHR just didn't
have enough gas to get back over the $95 level, which is a
surprise considering the market-wide rally on Wednesday.  Looking
at its chart you'll notice that volume has dropped off the last
few sessions as shares churn relatively sideways, which is what
you'd want to see during a consolidation.  No new headlines and
no change to our stop.

Picked on January 30 at $91.01
Change since picked:    + 3.32
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =


---

D.R.Horton - DHI - close: 30.79 chg: +0.24 stop: 27.99

The good news is that the DJUSHB homebuilders index appears to
have broken out of its recent consolidation and is heading back
towards its December highs.  Fortunately, DHI is leading the way
with new highs of its own.  The recent move to $31 extended its
bullish breakout on its P&F chart, which suggests a $44 price
target.  Traders following DHI may want to consider new positions
here since the stock hasn't gotten away from us or continue to
look for dips toward the $30.00 level.  No change in our stop.

Picked on February 08 at $30.00
Change since picked:     + 0.79
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       2.4 million
Chart =


---

Express Scripts - ESRX - cls: 69.14 chng: +0.23 stop: 67.00*new*

As boring as ESRX has been over the past few weeks, it looks like
something constructive is finally taking place.  The stock has
been chopping up and down between the $68 support and $71
resistance levels and support has been staunchly defended.  The
bears have been unable to achieve either an intraday dip below
$68 or a close below the 20-dma ($69.14).  That speaks of hidden
strength and with the daily Stochastics oscillator just starting
to hook upwards in bullish fashion, it looks like the next leg of
the upward trend may be ready to kick off.  As we've discussed on
numerous occasions, the best entries into this play will likely
come on a rebound from support, either an intraday dip and
rebound from above $68, or another successful close over the 20-
dma.  Once through $71, look for a bit more resistance near $72
before continuing up towards the all-time highs near $75.  ESRX
has held above support so well that it seems prudent to tighten
our stop to just below that support.  Raise stops to $67.

Picked on January 13th at    $68.32
Change since picked:          +0.82
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =        996 K
Chart =


---

General Dynamics - GD - close: 96.22 chg: +0.35 stop: 92.00

This looks like our next entry point for calls on GD.  The stock
has spent the last few sessions slowly drifting lower.  The lows
yesterday touched the $94.50 region, which had been previous
resistance, and GD quickly bounced.  The intraday chart shows a
nice trend of higher lows during the last session and a half.
It's now time for GD to get back to being the leader for the
rising DFI defense index.

Picked on February 08 at $96.88
Change since picked:     - 0.66
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       1.0 million
Chart =


---

Int'l Bus. Machines - IBM - close: 99.30 change: -0.66 stop:
96.50

What's wrong with Big Blue?  It's almost as though there's an
electric fence at $100 and each time the stock touches that
level, it gets hit by a fresh wave of selling.  IBM inched over
the century mark again this morning, but got knocked back to
close at its low of the day.  It was a bit surprising that the
stock couldn't manage a breakout to new recent highs yesterday
with the strong rally in Blue Chip stocks.  On the positive side,
IBM continues to build a pattern of higher lows and is finding
good support at its 10-dma ($99.11).  Continue using dips in the
$98 area to open new positions or else wait for a strong breakout
over the $100.50 level.  Maintain stops at $96.50.

Picked on February 1st at    $99.23
Change since picked:          +0.07
Earnings Date               4/15/04 (unconfirmed)
Average Daily Volume =     5.52 mln
Chart =


---

Phelps Dodge - PD - close: 84.25 chg: +0.21 stop: 78.00

Another rise in the price of copper to $1.24/lb sent shares of PD
soaring on Wednesday with a 5% gain.  PD quickly traded through
our TRIGGER at $80.51 and opened the play for us.  In last
night's newsletter we raised the stop loss from $75.99 to $78.00.
The rally continued today with a run to $86.51 before traders
began to take some money off the table.  Shares closed almost
flat on the session, which paints an ugly candle on its daily
chart.  All the technical indicators are bullish but be prepared
for potential profit taking tomorrow.  Those traders who missed
the trigger entry point can be looking for a dip.  PD did have
some good news today as Moody's Investors Service upgrade Phelps
credit outlook from negative to stable.  You'll also notice a few
articles regarding PD executives selling shares or cashing in
options.  The last time anyone on PD's management team sold stock
was back in 1999.  More recently PD's management sold quite a bit
of stock (or exercised options and sold stock) in the last couple
of months.  This news came out last week so it obviously didn't
have an affect on the stock price.  Fortunately for PD analysts
are now expecting the price of copper to stay above the $1.00
level for quite some time and this should be a driving force in
its stock price.

Picked on February 11 at $80.51
Change since picked:     + 3.74
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       1.6 million
Chart =


---

Teva Pharma. - TEVA - cls: 65.96 chng: -0.17 stop: 63.00*new*

That $66 resistance sure has been a pesky barrier to deal with
over the past few days, but yesterday's close above it and
today's close just a few pennies below, certainly hints that this
resistance is weakening.  And not a moment too soon either, as
the clock is ticking.  TEVA is set to report earnings on February
17th, which is next Tuesday.  That means we really should be
putting greater focus on when and where to exit, rather than
contemplating new positions.  TEVA has been a nice play because
it has gone in the right direction.  Unfortunately it hasn't done
so quickly enough and we have to think about getting out ahead of
earnings.  A breakout over $66 should be able to garner some
follow-through, and we'd suggest selling into strength above that
level.  Due to the proximity of earnings, let's get more
aggressive with our stop tonight and raise it to $63, which will
be below the 20-dma ($62.74) by tomorrow.

Picked on February 3rd at    $64.66
Change since picked:          +1.30
Earnings Date               2/17/04 (confirmed)
Average Daily Volume =     2.62 mln
Chart =



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

Anthem, Inc. - ATH - close: 84.53 change: +1.68 stop: 81.00

Company Description:
Anthem is a health benefits company serving over 7 million
members, primarily in Indiana, Kentucky, Ohio, Connecticut, New
Hampshire, Colorado and Nevada.  The company owns the exclusive
right to market its products and services using the Blue Cross
Blue Shield (BCBS) names in these states under license agreements
with the Blue Cross Blue Shield Association.  ATH's product
portfolio includes a diversified mix of managed care products,
including health maintenance organizations (HMOs), preferred
provider organizations (PPOs) and point-of-service (POS) plans,
as well as traditional indemnity products.  The company's managed
care plans and products are designed to encourage providers and
members to select cost-effective healthcare by utilizing the full
range of its medical management services.

Why we like it:
Since early November, shares of ATH have had quite a run, tacking
on nearly $20 in gains from the bounce off of support just below
$65.  Normally, we'd say the stock looks a bit extended and in
need of a pullback, but ATH seems to be different.  It tends to
settle into a bullish trend and even after moving to new highs,
just keeps on going until it runs out of gas.  The previous rally
in the first half of last year saw the stock vault higher by
nearly $8 after first pushing through to new all-time highs.  In
early February, ATH broke out above the $83 resistance level and
has been consolidating that breakout for nearly two weeks now.
If ATH can break out above the $85 level, we're expecting a move
to at least $90 and possibly even a bit higher.  But we'll cross
that bridge when we get to it.

After generating a fresh PnF Buy signal in early January when it
broke through $77, ATH just powered straight up and the tentative
vertical count off of that column of X (which is still growing)
is a whopping $107!  Clearly we won't be shooting that high
during this play, but it's nice to know there's room to run.  We
want ATH to prove itself to us a bit more before playing though,
so we're setting our entry trigger at $85.  Entries on the
initial breakout look good, as that will have the stock at new
all-time highs.  But more cautious traders can certainly opt to
wait for a pullback before playing.  Note how the stock has
continually found strong support near the 10-dma ($82.87)
throughout the rally of the past month, so dips back to that
average following the first touch of our trigger look like viable
entries.  We won't rule out a more significant dip though,
because the stock is up pretty strongly over the past month.  A
deeper pullback should find strong support at the 20-dma ($81.18)
so we're placing our stop initially at $81.

Suggested Options:
Shorter Term: The February $85 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.  But with February expiration next Friday, the better
choice appears to be the March $85 call

Longer Term: Aggressive longer-term traders can use the March $90
Call, while traders looking for more insulation against time
decay will want to use the June $90 strike.  Our preferred option
is the March $85 strike, which is at the money and should provide
sufficient time for the play to move in our favor.

! Alert - February options expire next week!

BUY CALL FEB-85 ATH-BQ OI=1584 at $1.05 SL=0.50
BUY CALL MAR-85*ATH-CQ OI=3088 at $2.70 SL=1.30
BUY CALL MAR-90 ATH-CR OI=1431 at $0.90 SL=0.40
BUY CALL JUN-90 ATH-FR OI= 118 at $2.85 SL=1.40

Annotated Chart of ATH:



Picked on February 12th at   $84.53
Change since picked:          +0.00
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.54 mln
Chart =



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

Avid Technology - AVID - close: 41.48 chg: -0.77 stop: 45.50*new*

So far so good.  Considering the bullish trend in the averages
the last few days and the big rally yesterday we're content to
see AVID slowly making new lows.  Shares failed under its
descending 10-dma yesterday and dropped toward the $41 region
this morning.  We did mention in the original write up that the
$40 level could be round-number support but our first target is
closer to the $38 area.  We're going to lower our stop loss to
$45.50, right at its 200-dma.

Picked on February 04 at $42.87
Change since picked:     - 1.39
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       612 thousand
Chart =



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

None


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The Option Investor Newsletter                 Thursday 02-12-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: All Traded on the NYSE
Traders Corner: We Worked Hard To Earn It – Let’s Keep It
Traders Corner: Three Line Price Break.


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

All Traded on the NYSE

___________________________________________________________________

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.
___________________________________________________________________


Guidant Corp - GDT - close: 62.69 change: +0.21

WHAT TO WATCH:  GDT gapped down a couple of points on Jan. 29th
after rival Medtronic (MDT) announced that its current quarter's
revenues would be lower than previously guided.  Sounds like
competition is heating up and GDT is taking some market share
from MDT.  That's probably why GDT found support at the $60.00
level and is now starting to rebound.  Aggressive bulls could see
the recent bounce as an entry point with a stop loss under
$60.00.  More conservative types may want to see GDT break back
above its gap (now resistance) from late January near the 65.30
level.

Chart=


---

Quest Diagnostic - DGX - close: 83.12 change: -2.11

WHAT TO WATCH:  DGX has turned in a stellar 2004 thus far.  The
stock rallied higher in anticipation of its late January earnings
and the company beat by 3 cents.  Furthermore, DGX guided higher
and the stock gapped up the next session and ran toward the $86
level.  Unfortunately, it has spent the last 2 1/2 weeks
consolidating under the $86 level and today's weakness may
forecast a deeper correction to come.  Its MACD indicator has
produced a bearish sell signal from very overbought while its
other technical oscillators are already turning lower.  Volume
was stronger than normal on today's decline although DGX did
bounce from the $82 level.  The challenge for bears is that the
top of the gap near $81 should be support on top of potential
support at the round-number $80 level.

Chart=


---

AutoZone - AZO - close: 90.39 change: -0.86


WHAT TO WATCH:  Bulls and Bears may want to keep an eye on AZO.
Several days ago the auto parts retailer broke out from a multi-
week consolidation and burst through technical resistance at its
50-dma and 200-dma and the $86.50 level.  Now the stock has
filled its mid-December gap down and paused right under the top
of the gap (in this case resistance).  Will the rally continue
above the $90 level?  Now that the gap is filled will it roll
over?  Or will it merely retrace some of its recent gains and
attempt another leg higher? P&F chart readers will note that the
turn around has already produced a new buy signal with a price
objective near $108.  However, there is P&F resistance near $96,
which coincides with price resistance on its daily chart.

Chart=


---

Bard C. R. Inc - BCR - close: 94.31 change: +0.77

WHAT TO WATCH:  Investors are still bullish on Bard.  The stock
had a strong January running from $80 to $90 in anticipation of
its earnings report.  The company beat the street on earnings and
revenues although net income dropped substantially on a
previously announced court verdict that cost BCR $35.5 million.
Post-earnings the stock rallied again but ran into resistance at
the $95.50 level.  After two weeks of sideways consolidation,
quite a feat given its impressive January gains, BCR looks ready
to breakout and make a run for the $100 mark.  Be sure to use a
good stop loss!

Chart=


---

Ingersoll-Rand Ltd - IR - close: 67.00 change: -0.57

WHAT TO WATCH: Bulls will want to keep an eye on IR.  The stock
recently bounced from its long-term rising trendline (on the
recent low at $64) and has now reclaimed its 50-dma.  Its
technical oscillators are turning bullish and Greenspan's
comments yesterday should ease investor concerns over cyclical
stocks like this one.  Consider a move over $68.00 as a potential
entry point for bullish positions.

Chart=



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

STJ $75.70 +0.67 - We mentioned GDT above and its bounce from
support.  STJ, a rival of both GDT and MDT, has seen nothing but
gains after its recent earnings report.  With its new EPIC line
of heart devices due out in May traders might want to be thinking
about their next entry point.

DF $34.40 +1.30 - The 3.9% gain in Dean Foods is also a bullish
breakout over resistance in the 33.50 region and a new all-time
high.

TTC $51.42 +3.74 - Toro Co., the lawn-care equipment maker,
soared after issuing a profit warning.  TTC now expects Q1
earnings in the 34-36 range, well above previous guidance at 15-
20 cents.  This is a new all-time high for TTC.


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

We Worked Hard To Earn It – Let’s Keep It
By Mike Parnos, Investing With Attitude

Here are a few more answers to commonly asked tax questions.  It’s
tough enough to make money trading.  That’s why I’m devoting this
space to helping you keep it in your pocket.

This will be the last of the tax related columns.  I hope you’re
benefiting from the information.  If you have further questions,
direct them to your own tax preparer or the folks at
TradersAccounting.com.

You might want to print out the last three Thursday tax-related
columns and give them to your tax preparer.  They may already know
everything we have covered, but, then again – they may NOT.  It’s
like chicken soup.  It can’t hurt.  They shouldn’t be offended.
If they are, well, they’ll get over it.  If they don’t get over
it, well, there are a LOT of tax preparers out there.
_____________________________________________________________

QUESTION: Are there any tax advantages to trading in a LLC above
what I am doing now as a mark to market Trader in Securities, who
already can deduct business expenses and such?

ANSWER: The main advantage is the certainty of being able to
deduct your expenses. The Trader in Securities designation, while
sounding very official, is completely absent from the IRS code,
and is roughly based upon tax court cases. Our concern is that
courts could easily lay down a new ruling, and completely wipe out
your Trader in Securities filing status. You could be trading all
year, assuming that you would be classified a Trader in
Securities, only to find the law changed in November and you being
unable to deduct your expenses. With that in mind and also the
asset protection an LLC will give you, it is much safer to trade
in the entity.

Moreover, if you have more than one member in the LLC, then the
LLC is taxed as a partnership, resulting in a lower audit rate.

QUESTION: Do "traders" have to pay Social Security and Medicare
taxes? And do they lose long-term capital gains rates?

ANSWER: If you file as a trader you do not pay the employment
taxes mentioned. It is still considered unearned income. One
problem with trader status is that you lose long-term capital gain
rates on the stock that is bought and sold as a trader. An easy
solution is to set up a separate account for your long-term
portfolio. Be sure that it is a completely separate account from
the short-term account, perhaps even with a different brokerage
firm.

QUESTION: I am a day trader and do not have a job besides trading.
If short-term capital gains are taxed at the ordinary income level
and I have no ordinary income, what would the tax rate be on my
short-term capital gains? I am also wondering if short-term
capital gains are added to ordinary income that could push my tax-
rate higher?

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

QUESTION:  What kind of retirement funding alternatives are
available to the independent trader?

ANSWER: Everyone who is in the business of trading has the ability
to have their business sponsor and form a 401(k) for their
business. The benefits are wonderful in each of two different
scenarios:

1. Let's say you are trading, or beginning to trade and have a
401(k) or 403(b) from a previous employer, or you have rolled one
into an IRA, or you have a self funded IRA. You probably don't
know this, but you have the ability to set up your own 401(k) and
transfer all of your funds into it. This would make you a Trustee
of your own plan at this point, giving you the freedom to make any
"prudent" investment. What this means to a trader is that you can
make your own investment decisions for your retirement funds,
rather than leaving your money with professional money managers
who are cutting your capital in half, effectively making your
401(k)s into 201(k)s! In addition to the wonderful benefit of
being able to control all of your retirement investment decisions,
you can borrow up to $50,000 from it to augment your own personal
trading account.

2. The second type of funding has to do with secondary tax
strategies in your Tax Efficient Trading Plan. In the years that
you make money trading, when you need a powerful vehicle to lower
your taxes, you and your business can contribute up to $40,000 to
your 401(k)! Not only is this contribution an expense to the
business, and lowers your taxable income, it is not income to you
until you retire, and have reaped the benefits of years of
compounded growth.

QUESTION: How do you elect mark to market accounting?

ANSWER: First, you must be considered a trader by definition, as
the mark to market accounting election isn’t available to
investors. You also need to be proactive, and decide ahead of time
what you want. To make the election for the current tax year, you
must file a statement with your tax return for the previous year.
That means by April 15th.

If you miss your deadline, you can’t elect mark to market
accounting until the next year, unless you establish a legal
entity. Then, you’ll have two months from opening to notate in
your meeting minutes that mark to market accounting is your
accounting method of choice.

Once you’ve properly elected mark to market accounting, fill out
Form 3115, an Application for Change in Accounting Methods, and
submit it when you file your current years tax return.

Within Form 3115, you’ll find a Section 481(a) adjustment, which
is a dollar amount based on your change in accounting methods.
When you make the MTM election, you’ll adjust the securities to
market value at the beginning of the year. The difference between
last years ending balances, which were recorded at cost, and the
fair market value at election, is your 481(a) adjustment. If the
adjustment is less than $25,000, you may deduct the full amount on
your tax return. If it’s greater than $25,000, deduct one-fourth
of the value each year for the next four years.  Please note -- if
you elected the mark-to-market accounting method on your legal
entity's first tax return, a 3115 is not required.

QUESTION:  When mark to market accounting is used by an LLC and
the net income is determined, how is that reported by the
individual members if reporting as a partnership?

ANSWER: The mark to market election in the LLC will allow all
income to be reported as net income or net loss, which will then
flow through to each of the partners via the K1 that is part of
the LLC tax return.
______________________________________________________________

Don’t Take Chances
When you have your taxes prepared, make sure the preparer has the
knowledge and background to deal with the tax laws applying to
full and/or part time traders.  As in the two previous tax Q&A
columns, the above answers were provided by the folks at
TradersAccounting.com.   They’re a good resource and offer a
variety of services.
______________________________________________________________

FEBRUARY CPTI POSITIONS

Position #1 -- OEX – Credit Spread Boogie – 569.43
With the market trending, let's not fight the tape.  We're going
to establish a bull put spread, take in some premium, and ride the
wave into shore.
We sold 3 OEX February 565 puts, and bought 3 OEX February 540
puts for a total credit of $6.80 (x 3 contracts = $2,040).
This strategy requires $25 x 3 contracts = $7,500.  We're only
trading three contracts because, if the market reverses
significantly, it might become necessary to close the bull put
spread and establish a bear call spread that may be wider and
would require more contracts.  We need to preserve our money for a
potential maintenance requirement.

Position #2 – MNX (mini NDX index) – Iron Condor – 150.13
This index seems substantially safer than the highly volatile NDX.
We going 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.  The market turned
down and that “skew” might come back to bit us in the ass, but the
market popped up off the 50-day MA.
We sold 10 MNX February 165 calls and bought 10 MNX February 170
calls for a net credit of $.40 x 10 contracts = $400.  Then we
sold 20 MNX February 150 puts and bought 20 MNX February 147.50
puts for a net credit of $.50 x 20 contracts = $1,000.  Our total
credit of $1,400.  Our maximum profit range is 150 to 165.  Our
exposure is only $3,600 ($5,000 less $1,400).  Maximum profit:
$1,400.

Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $102.54
This is a low risk and relatively safe play with a wide range.  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) - $106.33
We reduced 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.

OSX has violated our short $105 call.  The bear call spread could
be closed for $2.20 – resulting in a loss of $1.00 ($1,000).   For
our CPTI portfolio, I’m going to hang on for a little while longer
and give the OSX a chance to come back down.  If anyone is
actually in the trade, it might be wiser to take your loss at this
point.  Remember, the CPTI portfolio is playing with
“hypothetical” dollars.
_____________________________________________________________

ONGOING POSITION
QQQ ITM Strangle – Ongoing Long Term -- $37.25
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.

QQQ Adjustment
MARCH QQQ ROLLOUT:  We’re going to buy back the Feb. $36 put for
$.10 (or less) and roll out to the March $37 put at $.90 – taking
in an $.80 credit (or more).  We’re not going to roll out the Feb.
$34 call just yet.  We’re going to look for an interday dip in the
QQQs to buy back the Feb. $34 calls and then wait to sell the
March calls as the market rebounds – all this is IF the market
provides us with the opportunity.
___________________________________________________________

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.


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

Three Line Price Break.

I have used many different techniques in my trading looking for
the one that would give me an edge over other traders and an
insight into supply and demand. Point and figure charts help a
lot with this but there is another technique that I have used
that is quite intriguing. It is called Three Line Price Break
(3LPB), a more subtle form of point and figure where bullish and
bearish reversals are decided by price movement and less by
arbitrary rules as in PnF. Its name is derived from the fact that
today's price must exceed the low of the three successive white
lines, or the high of the three consecutive black lines, to get a
reversal. Like PnF, 3LPB uses the number three to reverse a trend
but differs in two other very important ways. PnF uses the highs
and lows of a candle but 3LPF uses only the close. Another
difference is that PnF uses "Xs" and "Os" but 3LPB uses black and
white boxes called lines.

If a rally or a selloff is strong enough to draw three black or
white lines then the high or the low of these lines has to break
before the trend changes. The term 3 LPB has to "break" three
lines of one color before an opposite color is drawn and the
trend changes.

Although many charting systems have 3LPB, I have always used
graph paper and plotted it myself. It is amazing how much of a
feel you get for the technique once you take on this task.

3LPB looks like a series of boxes with only one box per column.
Each box is called a line. A white box is called a white line and
a black box is called a black line. A new white line is added if
the previous high is exceeded or a new black line added if the
previous low is exceeded. You can use this technique on any
timeframe but since I use the 5-minute for daytrading I will be
speaking to the 5-minute chart.

Ok here are the rules:

1. Starting off, I will take a piece of 8*10 graph paper and
using it sideways, place a mark 1/2 down the page. This is the
open price and the only time you use anything other than the
close of the candle because you have to start somewhere.

2. If the close of first 5-minute candle is below the open you
shift over one column on the graph paper and draw a black line
(box) one row down. If the close of the first 5-minute candle is
above the open you shift over one column on the graph paper and
draw a white line (box) one row up.

3. Only if a candle closes at a new high or low do you shift one
column and draw either a black or white line.

4. Once three lines of the same color are drawn you count down or
up three lines to determine when the next opposite color line
will be drawn.

The best way to explain this technique is with an example. Here
is a chart of Monday February 10th 5 minute S&P e-mini.





Most charting services that chart 3LPB draw the boxes to scale
but I don't so I need to print the price on each line. I have put
the numbers of each comment below on the charts so you can follow
the comments with the charts.

Here is the 3LPB chart for the above 5-minute chart of the S&P e-
mini for February 10th.






1. Open was 1138.25, a white line is drawn if this candle closes
above 1138.25 or a black line drawn if this candle closes below
1138.25.

2. The close of the first 5-minute candle is 1138 so shift over
one column and draw a black line. Now a white line is drawn with
a close above 1138.25 or black if close below 1138.

3. 9:35 candle closes at 1138.75 so shift over one column and
draw a white line. Now a black line is drawn if the next candle
closes below 1138 or a white line is drawn if the candle closes
above 1138.75. Nothing is drawn if the candle closes in between.

4. 9:50 candle closes at 1139.25 so another white line is drawn.

5. 9:55 candle closes at 1139.75 so another white line is drawn.
Now the 3LPB starts because there are 3 white lines. So a black
line is drawn if a candle closes below 1138.25.

6. 10:00 candle closes at 1140 so another white line is drawn. A
black line is only drawn with a close below 1138.75.

7. 10:40 candle closes at 1141.75 and we draw a white line. A
black line is only drawn with a close below 1139.25.

8. 10:50 candle closes at 1143 and we draw a white line. A black
line is only drawn with a close below 1139.75.

9. 12:50 candle closes at 1144 and we draw a white line. A black
line is only drawn with a close below 1140.

10. 12:55 candle closes at 1145.75 and we draw a white line. A
black line is only drawn with a close below 1141.75.

11. 14:55 candle closes at 1141.25 and we switch to black lines
now. A white line is only drawn with a close above 1145.75.

Do you see nicely this has smoothed out the day. It has taken all
the noise out and has given you a very clear picture of where
supply and demand overtakes one another. Here is how it looks on
my graph paper. Very easy to keep track of throughout the day and
it also keeps you very engaged with the market you are plotting.




If your 3LPB is a series of alternating black and white lines
this reflects a trendless market whereas once a series of three
black or white lines are drawn you can define the trend. With the
example above, from the candlesticks February 10th looked like a
trendless day but as you can see it was in an upward trend the
whole day until the 14:55 candle that closed at 1141.25.

Here is the 5-minute chart for February 11th.



And here is the 3 LPB for this chart:



Notice how choppy the 3LPB was before 11:00 then the trend never
broke for the rest of the day.

Once a trader sees all the white lines and the profit he/she
could have made by just staying long you begin to wonder if you
could use this as a trading system Let's see what profit you
could have made using only 3LPB to trade:

1. Short at 1142.50 stopped at 1144 for a loss of 1.5 points.
2. Long at 1144 stopped at 1141.75 for a loss of 2.25 points.
3. Short at 1141.75 stopped at 1145.75 for a loss of 4 points
4. Long at 1145.75 sell at the close at 1155.50 for a gain of
9.75
5. Total for the February 11th would be 2 points. For February
10th the gain would have been 2.5 points. Not the kind of profit
I would think a good trading system would generate.

This drives home the point that 3LPB is not to be used in
isolation, as PnF should not be, but can be used to enhance your
candle charts in that it defines bullish or bearish trends and
takes out a lot of the noise in between.

Remember plan your trade and trade your plan.

Jane Fox


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