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Daily Newsletter, Thursday, 02/19/2004

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The Option Investor Newsletter                Thursday 02-19-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Conviction Test
Futures Markets: Gravestone Doji
Index Trader Wrap: Sell the news, or option expiration?
Market Sentiment: A Change in the wind?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-19-2004           High     Low     Volume Advance/Decline
DJIA    10664.73 -  7.30 10753.63 10656.59 1.96 bln   1189/2040
NASDAQ   2045.96 - 30.50  2094.92  2045.96 2.07 bln   1128/2036
S&P 100   566.06 -  2.27   571.62   565.83   Totals   2317/4076
S&P 500  1147.06 -  4.76  1158.57  1146.83
W5000   11176.92 - 60.40 11302.82 11174.80
RUS 2000  582.59 -  8.89   596.00   582.38
DJ TRANS 2892.80 -  8.30  2933.37  2892.67
VIX        15.80 +  0.21    15.97    15.20
VXO (VIX-O)16.90 +  1.16    16.90    15.46
VXN        24.24 +  0.51    24.55    23.16
Total Volume 4,386M
Total UpVol  1,116M
Total DnVol  3,170M
Total Adv  2672
Total Dcl  4591
52wk Highs  507
52wk Lows    10
TRIN       0.88
NAZTRIN    2.25
PUT/CALL   0.72
************************************************************

Conviction Test

Good earnings news breaking out all over but economics are
not following the plan. The combination of these factors in
an option expiration week turned into new highs and a strong
drop from those highs. This created a test of conviction for
those already long and a buying opportunity for those who
still want to be long.

Dow Chart - Daily



Nasdaq Chart - daily



The fly in the ointment for investors was the Philly Fed
Survey which dropped to 31.4 from 38.8 last month. This was
the 8th consecutive month in positive territory but a major
drop from last months high. The internal components were not
exciting with New Orders falling to 27.8 from 36.5. Shipments
fell to only 19.3 from 33.1. Back orders fell into the low
single digits at 4.4 from 10.7 and was the second month of
declines. Employment fell to only 12.5 from 17.5 and was
also the second monthly decline. Prices paid rose to 43.7
from 35.3 and prices received jumped from 9.4 to 18.9. The
picture was very clear. Orders, production and employment
fell while prices showed a significant inflationary jump.
The only really positive component was the jump in the
average workweek to 23.6 from 12.9. This suggests companies
are trying to make do with existing workers and at some point
they will have to hire if hours worked continues to rise.
Inventories also rose for the first time in five months.
Could that have been on purpose or because sales suddenly
shrank? The prices paid component reached a nine-year high
and it was the seventh monthly increase. This trend was
also seen in the NY Empire Survey earlier this week.

Jobless Claims fell more than expected to 344,000 and back
under the 350K level again. However, claims for last week
were revised upward by +5,000 to 368K. The four-week average
rose to 352,000 and the highest level since December. The
bad news here was a significant jump in continuing claims
to 3.186 million from 3.08 million. Most analysts suggested
the jump was weather related but I miss the connection. This
report was a neutral for the market despite the minor relief
bounce in the futures when it was released.

Leading Indicators rose by +0.5% and inline with expectations.
Considering this number is composed of already released data
from other reports including jobless claims, stock market and
bond data is should be called the lagging indicators. Only
five of the ten components showed any gains but this was
the biggest jump since October. It is mostly ignored since
the data is already old.

The biggest news of the day was old news and that was the
AMAT/BRCM boost to the chip sector. The earnings news for
the day was less than exciting. Wal-Mart said an excellent
January pulled the 4Q out of mediocre territory and turned
it into a double digit quarter. Wal-Mart said the holiday
period was challenging and it had to result to deep discounts
to move apparel. WMT posted 63 cents and inline with estimates
and said strength in international sales and a resurgence
at Sam's Club helped WMT meet expectations. CEO Lee Scott
said 2003 was not a great year and he was much more
optimistic about 2004. Sales for the quarter hit $74.49B.
The bad news for other retailers was a new commitment to
be the low price leader in 2004 and he reiterated they were
not going to raise prices to increase profits.

Competitor Target beat the street by four cents and posted
a 91 cent profit. Sales were only a fraction of Wal-Mart's
at $15.57B but were inline with estimates. The better results
were do to higher gross margins and improved product mix.
Credit card operations added +$641 million in profits to
the total. Considering how stores like Sears have been
fleeing the credit card business this is remarkable.

After the bell today HPQ formally announced their earnings
of 35 cents which they preannounced without warning last
week. The market was less than impressed with the inline
guidance. The number of companies reporting has slowed to
a trickle but most are still beating estimates. These
companies beat tonight, UVN +1, JWN +8, BEAS +1, OCLR +1,
PTEK +1, SRNA +1. Unfortunately most guided inline with
estimates or slightly down. The quality of companies this
late in the cycle precludes much in the way of blowout
guidance.

The conviction of those long was tested today after the
Dow set a new 52-week high at 10753 and the Nasdaq came
very close to 2100 at 2094. The worst performer was the
Russell at -1.50% with the Nasdaq close behind at -1.46%.
The Nasdaq closed down over -30 points after being up
+17 at the open. The range of movement was nearly 50
points but the majority of it was down. After the gap
open there was never a serious attempt to move higher
for the Nasdaq but the Dow hit its highs as late as 2:PM.

The Dow gapped up to 10725 and after a brief pullback
rallied to 10750 twice about two hours apart beginning
shortly after noon. The Dow showed amazing strength until
the crash but the Nasdaq and Russell bled points from the
start. At 3:20 all the markets imploded with the Dow
dropping nearly -80 points in just under 30 min. The
Russell fell -8 points from 2:30 into the close. The
initial selling in the small caps and techs with the
Dow remaining so strong appeared to be rotation into the
blue chips. I remarked in the monitor at the time that it
appeared to be a rotation in progress and we could have a
significant dip ahead.

The conviction part comes tomorrow. The Nasdaq has nearly
completed another test of its 50dma currently at 2040 and
that retest has come on the heels of a lower high. This
is a bad sign and could suggest the retest may not hold
on the initial try. There is still strong support at 2000
and the 100dma is rapidly rising to meet the price at
that 2000 level. Currently the 100dma is 1980. Buyers
with probably have their conviction tested again on Friday
as those levels are targeted. Make no mistake this is a
serious support test for the Nasdaq. A failure at 2000
could be very dangerous.

There are two wild cards in play here. The first is Option
Expiration on Friday. This massive swing from new highs to
retesting support on Thursday could have been the result
of option positions being squared. The last two months
we have had strong opex rallies and traders could have
overshot for February and produced a negative bias to the
settlements. This could continue through Friday.

The second wild card is the Dow. The Dow has not tested
its 50dma since November. It is way over due despite the
current bullish sentiment. Fear of a Dow correction could
keep buyers on the sidelines until some stability appears.
Fortunately for the Dow to retest the 50dma at 10439 it
will have to break several levels of strong support at
10650, 10600 and 10550. This is not likely to happen in
one day and may not happen at all.

The spark for the entire morning rally was AMAT and BRCM.
Both opened much higher and then closed negative for the
day. AMAT hit 23.86 at the open and closed at 22.14 and
the low for the day. BRCM hit a high of $44 and closed at
$41.56. The SOX hit a high for the month at 535 and then
closed -20 points lower at 515. This was a huge reversal
in the semiconductor stocks and it is no wonder the Nasdaq
and Russell followed suit. The SOX closed right on its
50dma but that has not been real support. The SOX has
performed better in recent weeks from the 100dma now at
501.

Semiconductor Sector (SOX) Chart - Daily


Russell 2000 - Chart



Late tonight the Semiconductor Book-to-Bill was released
for January and it came in at 1.18 and a drop from the
1.23 final for December. This was the sixth monthly rise
for semiconductor orders and the ratio would have been
higher but shipments rose +8.2% compared to only a rise
of +3.7% for orders. This is very good news for the sector
but the late release of the numbers tends to be overlooked
by most investors. This could slow any chip selling on
Friday if it makes the headlines.

The bottom line to all this mumbo jumbo is that we are
likely to see the Nasdaq/SOX take another dip down on
Friday and that dip could continue into next week due to
a lack of further catalysts for February. This is the
buying opportunity that all tech bulls should be excited
about. At least those with conviction for their position.
If the afternoon downdraft was options related then the
dip should be brief. However, the Nasdaq was the laggard
all week and we need to see how it performs on Monday
before making any judgment calls.

The only material economic report on Friday is the CPI
and that is before the market opens. As a trader tonight
I would suggest not opening any new long positions until
Monday. Option expiration Friday's are usually wild and
crazy at the open followed by total boredom. With the
potential for more selling and the ever present weekend
event risk I would wait for Monday to go bargain shopping.
Even then it could be risky because next week is filled
with economic reports that could mimic the Philly Fed
today. This is a risky period for February but any
weakness should simply be more consolidation in the
current range. You are going to get tired of hearing
that but until the range breaks it is still true. The
range on the Nasdaq is still 2000-2100 and 10450-10700
on the Dow. Take Friday off and make it a three-day
weekend. Come back next week ready to pick up some
bargains at a discount.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Gravestone Doji
Jonathan Levinson

The NQ broke above strong resistance at 1520 before the cash
open, but reversed strongly in the late afternoon.  ES and YM
were notably stronger but also closed negative, while treasuries
and precious metals recovered from intraday lows to close lightly
positive.  The US Dollar Index drifted sideways in positive
territory, digesting yesterday's substantial gain.


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 tickled the descending daily resistance line
before falling back to within positive territory atop yesterday's
large outside reversal.  The absence of weakness was sufficient
to turn the daily cycle oscillators up, halting the downphase and
leaving us on bullish kisses.  Any show of strength tomorrow will
break the descending trendline in place for the past 6 months and
generate fresh buy signals on the dollar from bullish
divergences.  86.40 is next resistance.


Daily chart of April gold


April gold was sold aggressively and reached a bottom at 408.80,
just above 408 support discussed here yesterday.  The bounce
failed at 412 resistance, and contract spent the remainder of the
session caught between the two levels and closing higher by .40
at 411.  The HUI and XAU recovered from strong initial weakness
to close lower by .18% at 100.24 for the XAU, -.31% at 229.83 for
the HUI.  As the binary dollar trade continues apace in precious
metals, I'd expect a dollar breakout to again challenge 408 and
next support at 402.  The daily cycle upphase continues, but the
Macd is hesitating, and another lower close would likely abort
the current upphase.  Rising trendline support has advanced from
398 to 400, and tomorrow is setting itself up as an important day
for gold traders.


Daily chart of the ten year note yield


Ten year note yields (TNX) moved within a wide range today,
spiking down on the disappointing Philly Fed report released at
noon.  Bonds had been very weak until then, but realigned with
the daily cycle trend following the bad news, presumably as
traders assumed that it would discourage the Fed from tightening
for a longer time.  Equities had held up until the final hour
selloff, despite a net addition of 2.5B from the Fed via its
morning open market operations.   For the day, the TNX rose 0.3
bps or 0.07% to 4.052%.


Daily NQ candles


The NQ's gravestone doji was also a key reversal, engulfing the
prior two days and closing at the lowest level in 8 sessions.
Everyone who's gone long and held in nearly 2 weeks is now
underwater.  The move bounced from our posted support at 1482,
and a print below 1480 opens the door to the head and shoulders
top we've been discussing for the past few Futures Wraps.  The
daily cycle upphase hesitated but did not abort, although the
Macd left off with a bearish kiss.  Any weakness tomorrow could
lead to a cascade through 1480, but with options expiry upon us
and its tendency for rangebound, "tractor-beam" trading, a strong
directional move for Friday is difficult to predict.  A move
below 1480 will be our first clue that something's amiss.
Support is at 1460, followed by 1445.  For the day, NQ dropped 23
points or 1.52% to close at 1488.


30 minute 20 day chart of the NQ


The 30 minute NQ reaffirmed why bearish oscillator divergences
*do* matter, with multiple support lines shredded following the
bond market close at 3PM.  Until then, it was a mere doji
reversal, but the action of the last hour and fifteen minutes
turned it into a key outside reversal.  The strong rejection at a
higher high followed by a steep plunge to lower lows portends
followthrough to the downside, but the 30 minute cycle
oscillators are entering oversold territory and don't have a
tendency to trend for long at either extreme.  The daily cycle
downphase was likely violated by this afternoon's spike to 1482,
but until it turns, we have to expect support to hold.  With
Fibonacci support at 1482, the 30 minute cycle oscillator nearing
the bottom of its range and op-ex Friday tomorrow, there's a good
case to be made for 1480 holding.  There's light support at 1476,
below which 1460.  Look for resistance at 1488, 1492, 1502 and
1511.


Daily ES candles


ES fell 4.50 to close at 1146.75, a slight .39% decline.  The
selloff was as sudden as that which occurred on the NQ, but the
prior weakness didn't come close to the NQ.  Nevertheless, longs
from this week were trapped by the post-3PM selloff, and the
daily cycle oscillators are set up for a bearish divergence if
the price fails to turn back up.  As on the NQ, the Macd turned
back down and left off with a bearish kiss.  Interestingly, the
ES failed to take out yesterday's high of 1158.75, peaking today
at 1158.50.  We therefore had a lower low and lower high, but not
a key reversal on the gravestone doji.


20 day 30 minute chart of the ES


Again, the ES is notably farther from the edge of its proverbial
cliff than is the NQ, and the 30 minute cycle oscillators show
that the downphase is less advanced than on the NQ.  Next support
is at 1144, followed by 1142 and then the confluence zone from
1130-1136 that we recall so well.  Despite the mild .39% decline,
bears were spared the rising triangle breakout that seemed to be
imminently forming.  Again, the daily cycle upphase will be the
key here, and if there's any further selling tomorrow, that
should cap the current bull run.  Note that just as the US Dollar
Index is a few ticks away from a breakout, so is the ES verging
on a daily cycle breakdown.  While it's a trite expression,
tomorrow is going to be a very interesting session.


150-tick ES


Nothing to see here.  The short cycle oscillators were bouncing
off the bottom of the 30 minute cycle channel following the
initial large volume selloff before 3:30PM.  1153 was strong
support right up until it wasn't, and it should provide
formidable support on any bounce.


Daily YM candles


YM dropped a mere 8 points or .07%, the clear leader throughout
the day and mostly oblivious to the damage wrought on the NQ.  It
printed a new roughly 32 month high today before the selling took
it down, but despite the gravestone doji print, it posted a
higher low and higher high.  Cyclically, it's lined up similarly
to the ES.


20 day 30 minute chart of the YM



Tomorrow is a critical day, with the US Dollar Index on the verge
of a breakout and the ES and NQ teetering on the verge of a
divergent daily cycle upphase abort.  Precious metals and bonds
both strained at their daily cycle upphases as well today.
Whether these daily cycle phases end early or not is the question
for now, but it's becoming apparent that they will end.  Given
the extent to which the dollar has declined and equities,
treasuries and commodities have extended, the next weekly cycles
have the potential to change the current market picture
dramatically.  Tomorrow could give us our first confirmation of
that turn.  See you there.


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

Sell the news, or option expiration?

Semiconductor equipment maker Applied Materials (NASDAQ:AMAT)
$22.13 -0.8% surged to a session high of $23.86 in the first 5-
minutes of trade, up more than 6% than Wednesday's close, to then
give back those gains to finish lower.

The NASDAQ-100 Tracking Stock (AMEX:QQQ) $36.98 -1.51% jumped to
$37.90 in the first 5-minutes of trade, up more than 1% from
Wednesday's close, to then give back those gains to fish lower.

One could argue a case of "sell the news" as the GSTI Software
Index (GSO.X) 156.87 -2.48% traded soft all session after tax
preparation software-maker Intuit (NSADAQ:INTU) $45.24 -8.03%
lead sector declines as investors "sold the news" when the
company's forward guidance didn't add up to Wall Street's
consensus estimates.

One could also argue that today's index expiration and tomorrow's
pending tracking stock and individual stock expiration played a
role in today's reversal of fortune session.

Jim Brown posted some "Max Pain" levels for various indices,
trackers and stocks in this afternoon's Market Monitor.  I added
the Semiconductor HOLDR's (AMEX:SMH) $41.88 -1.96% as well as
Newmont Mining (NYSE:NEM) $44.04 +0.93% to the list.

A quick check of AMAT's February Max Pain Theory value was
calculated at $22.50.  Sell the news, or option expiration
related?

Market Monitor - 02:34:42-02:39:33 PM EST



I tend to view Max Pain theory with a grain of salt, but it can
certainly have an impact on how the major indices and stocks
trade into an option expiration.

Had I been alert to QQQ Max Pain theory of $37, I might have
taken some of my own advice this morning at 09:53:00 AM EST when
I noted in the Market Monitor that the opening 5-minute bar on
the QQQ was $37.85 and today's (Thursday's) DAILY R2.  I further
noted that one thing traders might be cognizant of is tomorrow's
option expiration for the QQQ, where traders might be alert to
some gravitation toward the $37.00 level.  We had been seeing a
lot of trade around the $37.43 level the last couple of weeks and
I thought $38.00 was going to be some heavy resistance going into
Friday's close.

Again... I take Max Pain theory levels with a grain of salt, but
the QQQ certainly seemed to have some type of Star Trekian
gravitational force of selling pulling it lower into today's
close.

Still, I can't entirely dismiss the thought that today's reversal
on "good news" from AMAT can't be in play.

I'm a bit shocked that Biogen Idec (NASDAQ:BIIB) $58.88 +10.61%
and Elan (NYSE:ELN) $13.33 +12.96% surged again in today's
session.  When buyers show conviction, then a February Max Pain
value of $45 for such a large-cap biotech like Biogen means
nothing, where this would be an example of "buy the news and keep
buying!"

Market Snapshot / Internals - 02/19/04 Close



The hourly intervals do show some internal as well as price
action that would tie in with broader observations of what
indices have been stronger than others in recent weeks.

The NYSE Composite ($NYA.X) 6,715.30 -0.06% did hold strong until
the last hour of trade, whereas the NASDAQ Composite (COMPX)
2,045.96 -1.47% found a more steady decline in price action as
the session progressed.

The Semiconductor Index (SOX.X), with AMAT as a positive
catalyst, matched its December 1, 2003 relative "left shoulder"
high of 536.32 with a morning high of 535.55.

If buyers had shown as much conviction for the semiconductors in
today's session, or the chip equipment stocks, as buyers have for
BIIB and ELN, then we wouldn't have to wonder if today's trade
was sell the news, or option expiration related.

Pivot Analysis Matrix -



Some of tomorrow's DAILY S2-R2 point ranges would rival those
found in the WEEKLY S2-R2 ranges, and when I consider that much
of today's economic data wasn't overly surprising one way or the
other (bullish or bearish), I've got to think today's session was
heavily influenced by some option expiration activity.

I would have to think there are a heck of a lot more options
being traded, or positions being hedged in the INDU, DIA, SPX,
SPY, NDX, QQQ and SOX than in the BIX.X or the TNX.X.  It should
be notable that the S&P Banks Index (BIX.X) 354.43 +0.32% did see
a pretty good price swing intra-day, but Treasuries and the
Dollar Index (dx00y) were little changed considering the more
wild gyrations of the major indices.

I will make a note tonight that QQQ Max Pain for MARCH, which
will be a Triple Witching expiration is current calculated at
$36.00.  This can change in the day's and weeks to come and would
ONLY serve as a guidepost of where the bulk of QQQ put/call open
interest could be taken to unprofitable levels by March 19
expiration.

Wilshire 5000 Total Market Index ($TMW.X) - Daily Intervals



In last night's Index Wrap we quickly looked at both the NYSE
Composite ($NYA.X) and NASDAQ Composite (COMPX).  I like to view
the Wilshire 5000 as somewhat of a great mixing pot of all stocks
large and small, which combines stocks listed on both the NYSE
and NASDAQ.  The only "level" I really see providing resistance
for this broadest of broad index is a spike relative low of
11,290, which dates back to October 1999, where a recent
horizontal support level could be tied to relative highs found in
January and March of 2002 before the $TMW.X went on to trade its
October 2002 lows of 7,273.40.

I didn't show a conventional retracement on the above chart, but
if I had taken a retracement from the all-time high of 1,499.60
to that October 2002 low, 50% retracement would be at 11,132.50.

A couple of investors also pointed out that both the NYSE and
NASDAQ NH/NL indications could be combined to calculated a "total
market" NH/NL ratio.  I show the NYSE and NASDAQ NH/NL separate.

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



An intra-day chart would show the QQQ edging lower into its
MONTHLY Pivot of $37.43, and then picking up some momentum once a
5-minute bar chart close below $37.43 was found.  A test for the
thought that today's trade was largely option expiration related
would be for the QQQ to traded either side of $37 tomorrow,
perhaps a range between $36.70 and $37.25, with a Friday close
right near $37.00.

Today's QQQ high may also be taken notes on, where its high is
tied to the "right shoulder" of the potential head/shoulder top
formation in the Semiconductor Index (SOX.X).

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



The SPX can't make up its mind between 1,143 and 1,157 for six
sessions now.  Even in the morning updates we see one or two
stocks each day generating point and figure buy signals on
alternating days.

Dow Diamonds (DIA) Chart - Daily Intervals



With the OEX and QQQ showing some ability to gravitate toward a
Max Pain level, I thought I'd quickly slap a fitted retracement
on the DIA.  Nothing too scientific about the fitted retracement
and just anchored it to a December low and placed the 50% at
$105, from Jim's notes.  The DIA did show the ability to fall
from roughly 107 to 105 on January 28th.  I went back and checked
the Index Trader Wrap archives and found I had discussed that
day's trade as perhaps being tied to the markets thought of
potential Fed tightening.

Jeff Bailey


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

A Change in the wind?
-J. Brown

Is investor sentiment changing?  The markets rallied on good news
this morning after Wal-Mart and Applied Materials issued positive
earnings reports.  WMT, a Dow component, helped lead the Dow to a
new 32-month high.  AMAT, a component of the NASDAQ-100 and the
SOX index, also traded strongly higher this morning only to give
it all back and more by the close.  It is this reversal in techs
that is disturbing.  Most of the tech sector indices were trading
higher for the first half of the session but a late day reversal
washed over the entire group.  Actually, the reversal hit the
entire market.  Not one sector closed near its highs save for the
XAU gold & silver index and only this pared its losses from the
morning as investors moved into gold in self defense. For the
markets to turn lower on good news may signal a change in
direction, even if it's just a short-term change.

Looking more closely at the sector indices I notice the Dow
Transports are looking pretty weak after their recent failure
under the 50-dma.  You've heard it before.  Traditional Dow
theory states that we can't have an extended rally without the
Transports participating and right now they look ready to lead
the markets lower.

I would go into more detail about the reversal in the various
tech sectors but they all look the same.  The selling picked up
strongly in the afternoon and frankly the whole market looks
poised to trade lower tomorrow morning.  Market internals were
bearish with declining stocks outnumbering advancing stocks
nearly 18 to 10 on the NYSE and 2 to 1 on the NASDAQ.  Down
volume was almost double up volume on the NYSE and more than four
times up volume on the NASDAQ.

Buckle your seat belts and store you tray tables in the upright
position.  Tomorrow could be a volatile option expiration Friday.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  7416
Current     : 10664

Moving Averages:
(Simple)

 10-dma: 10639
 50-dma: 10439
200-dma:  9609



S&P 500 ($SPX)

52-week High: 1158
52-week Low :  788
Current     : 1147

Moving Averages:
(Simple)

 10-dma: 1146
 50-dma: 1119
200-dma: 1033



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  938
Current     : 1484

Moving Averages:
(Simple)

 10-dma: 1495
 50-dma: 1481
200-dma: 1347



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

We have an interesting development in the volatility indices.
The VXO added 7.3% today on the market sell-off.  More
importantly it seems to have set a new higher low, which could be
forecasting a trend change.

CBOE Market Volatility Index (VIX) = 15.80 +0.21
CBOE Mkt Volatility old VIX  (VXO) = 16.90 +1.16
Nasdaq Volatility Index (VXN)      = 24.24 +0.51

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.72      1,242,874       890,484
Equity Only    0.59        953,805       560,338
OEX            1.58         39,892        62,931
QQQ            2.67         65,589       175,182


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

Bullish Percent Data

           Current   Change   Status
NYSE          77.6    + 0     Bull Confirmed
NASDAQ-100    69.0    - 1     Bear Alert
Dow Indust.   86.7    + 0     Bull Confirmed
S&P 500       87.6    - 1     Bull Confirmed
S&P 100       89.0    + 0     Bull Confirmed


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

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


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

 5-dma: 1.01
10-dma: 0.95
21-dma: 0.99
55-dma: 0.99


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    1043      1042
Decliners    1794      2012

New Highs     327       243
New Lows       11        11

Up Volume    690M      366M
Down Vol.   1177M     1655M

Total Vol.  1914M     2040M
M = millions


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

Commitments Of Traders Report: 02/10/04

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

No change for the Commercial traders.  Small Traders have
grown slightly more bullish.


Commercials   Long      Short      Net     % Of OI
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%)
02/10/04      412,217   414,044    (1,827)   (0.2%)

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
01/23/04      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%
02/10/04      143,496    80,362    63,134    28.2%

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


E-MINI S&P 500

Commercials are starting to put some money to work and we're
seeing another jump in contracts for both longs and shorts.
Small traders have pared back their longs a bit and put some
of that money on the short side.


Commercials   Long      Short      Net     % Of OI
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%)
02/10/04      297,601   356,630    (59,029)  ( 9.0%)

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
01/23/04     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%
02/10/04     110,480     58,428    52,052    30.8%

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


NASDAQ-100

Not much change from the Commercial traders but they are
a tiny bit more bullish here.  Small Traders have significantly
bumped up their long positions.


Commercials   Long      Short      Net     % of OI
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%
02/10/04       44,406     40,439     3,967    4.7%

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
01/23/04        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%)
02/10/04        9,906    13,018    (3,112)  (13.6%)

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

Not much change this week for Commercials.  Small traders
are slightly more bearish on the Dow.


Commercials   Long      Short      Net     % of OI
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%
02/10/04       21,764    11,974    9,790      29.0%

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
01/23/04        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%)
02/10/04        6,267    14,220   (7,953)   (38.8%)

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 02-19-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: IBM
Dropped Puts: None
Call Play Updates: AHC, APOL, ATH, BRL, DHR, DHI, GD, PD, QCOM, RNR
New Calls Plays: RJR
Put Play Updates: AVID, MMM
New Put Plays: CTSH


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

Int'l Bus. Machines - IBM - cls: 97.80 chng: -0.62 stp: 97.50

It's time to throw in the towel on Big Blue.  Not only has the
stock been unable to participate in the rally attempts in the
overall market, it has actually been losing ground and today's
breakdown under the $98 level does not bode well for the bulls.
In fact, the stock came within 2 cents of our $97.50 stop today
before a slight rebound at the close.  IBM looks like it will
take out that stop tomorrow and then there's only mild support at
$97 before a drop back to the 50-dma just over $95.  Let's cut
our losses here and drop the play tonight.  Any rebound into the
$98-99 area should be looked at as a gift, affording a more
favorable exit.

Picked on February 1st at    $99.23
Change since picked:          -1.43
Earnings Date               4/15/04 (unconfirmed)
Average Daily Volume =     5.34 mln
Chart =



PUTS:
*****

None


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within the same firm. Licensed Option Principals Andrew Aronson
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option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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

Amerada Hess Corp. - AHC - cls: 61.53 chng: +0.28 stop:
57.75*new*

Defying the odds, shares of AHC have continued to steadily climb
all week, with each day yielding a new 52-week high.  Today's
action was no different, with the stock actually tapping the $62
resistance level before dropping back a bit with the rest of the
market heading south.  With the 10-dma ($59.96) now reinforcing
near support at $60, a pullback to that level can be used for
continuation entries.  Support at $58 should now be very strong,
with the 20-dma ($58.35) above that level and the 30-dma ($57.99)
not far behind.  Raise stops to $57.75.  Once AHC pushes through
the $62 level, look for next solid resistance in the $64-65 area.

Picked on February 10th at   $59.53
Change since picked:          +2.00
Earnings Date               1/28/04 (confirmed)
Average Daily Volume =     1.07 mln
Chart =


---

Apollo Group - APOL - close: 77.61 change: +0.47 stop: 73.50

Suffering the same fate as the broad market, APOL keeps testing
resistance near $79, but so far has been rejected on each
attempt.  That pattern repeated on Thursday, with the stock
pushing right up to resistance and then fading throughout the
afternoon, pressured by the decline in the rest of the market.
Support does seem to be building near $77 and aggressive traders
can target new entries on another successful rebound there.  But
APOL really looks like it could dip a bit further and come back
to test the $75 support level before kicking off another strong
upward push.  With that support level reinforced by the 20-dma
($75.48) and the 30-dma ($74.62), we like new entries near that
level.  Traders that would prefer to enter on strength really
need to see a breakout over the $80 level before playing.
Maintain stops at $73.50 for now.

Picked on February 1st at    $77.44
Change since picked:          +0.17
Earnings Date               12/18/03 (confirmed)
Average Daily Volume =     1.65 mln
Chart =


---

Anthem, Inc. - ATH - close: 82.60 change: -0.23 stop: 81.00

After just cresting the $85 level on Friday (enough to activate
our trigger), ATH's performance this week has really been
disappointing, as the stock has lost ground every day.  As we've
noted before, the $82-83 area should be solid support if the
stock has any hope of reaching higher levels over the near term
and the 20-dma ($82.32) looks like a key level to watch heading
into the weekend.  A rebound from that level can be used for
aggressive traders to establish new positions, but if it fails to
produce that rebound, then it appears likely that our stop will
be threatened.  Traders looking to enter on strength will need to
wait for ATH to reclaim the $85 level and push through last
Friday's $85.25 high before playing.

Picked on February 12th at   $84.53
Change since picked:          -1.93
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.46 mln
Chart =


---

Barr Pharmaceuticals - BRL - cls: 78.90 chg: -0.66 stop: 77.95*new*

Uh-oh!  BRL trade up and through our trigger of $80.61 on
Wednesday but promptly rolled over and closed back under the $80
level.  That's never a good sign and today's weakness confirms
yesterday's failed rally.  Currently the stock is trading at its
10-dma.  Unfortunately, we don't expect the 10-dma to hold it and
BRL will probably retest support at the $78.00 level.  We rarely
do it but we're going to slide our stop loss backwards.  Instead
of $78.00 we're going to use 77.95 and give BRL a chance to
bounce from the $78 level.  If it breaks $78.00 then we should be
stopped out.

Picked on February 18 at $80.61
Change since picked:     - 1.71
Earnings Date          02/05/04 (confirmed)
Average Daily Volume:       730 thousand
Chart =


---

Danaher Corp - DHR - close: 92.81 cls: -0.19 stop: 90.00 *new*

Shares of DHR followed the market lower in the last 90 minutes of
trading today.  The trend of lower highs is beginning to take a
stronger shape and the stock looks ready to retest support at its
rising 50-dma.  Aggressive traders may want to consider buying a
bounce from the 50-dma (near $91) but we are not suggesting new
positions at this time until DHR can trade back above the $95.00
level.

Picked on January 30 at $91.01
Change since picked:    + 1.80
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =


---

D.R.Horton - DHI - close: 30.50 chg: -0.29 stop: 27.99

The late day profit taking also hit the homebuilders as the
DJUSHB index closed under the 600 level.  DHI actually lead the
group lower early on due to a downgrade from CSFB who lowered
their rating from "neutral" to "under perform".  DHI quickly
slipped to the $30.00 before bouncing from support.
Unfortunately, shares began to roll over again during the
afternoon and both DHI and the sector look prone to more profit
taking tomorrow. If DHI closes under the $30.00 level we would
become very cautious.  However, more aggressive traders can look
for a potential entry point from the 29.35-29.50 level, which
should be DHI's next support.

Picked on February 08 at $30.00
Change since picked:     + 0.50
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       2.4 million
Chart =


---

General Dynamics - GD - close: 95.26 chg: -0.51 stop: 92.00

In the last three days GD has been awarded another $91 million in
defense contracts but it hasn't been enough to spark any fire
under the share price.  The sideways consolidation continues and
we expect GD to retest the $94.00 level of support soon.  Keep an
eye on the DFI defense index.  Defense has been one of the
strongest sectors in the market recently but this afternoon's
sell-off really began to pick up speed in the DFI.  Traders can
wait for a bounce from $94 as a new entry or wait for a move back
over $96.

Picked on February 08 at $96.88
Change since picked:     - 1.62
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       1.0 million
Chart =


---

Phelps Dodge - PD - close: 81.88 chg: -0.44 stop: 78.00

There continues to be a lot of talk about the rise in metals,
specifically copper and silver, due to the growing demand as the
global economy picks up steam.  Copper has been a real standout
and added 2.45% in today's session to a new multi-year closing
high.  Strangely there seems to be a disconnect today between
shares of PD and the rise in copper.  We would have expected PD
to trade higher on the commodity's move.  Right now PD has a
short-term trend of lower highs and is suggesting a retest of
support at the $80 level soon.  Aggressive traders can try and
buy the next bounce from $80 but we would be cautious and look
for a new (short-term) relative high above $83.50 before
initiating any new positions.

Picked on February 11 at $80.51
Change since picked:     + 1.37
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       1.6 million
Chart =


---

Qualcomm, Inc. - QCOM - close: 58.79 change: -0.27 stop: 56.00

With the Technology sector's weakness this week, QCOM just hasn't
been able to get it in gear.  Despite that inability, it has been
impressive that the stock was still able to challenge the $60
resistance level this morning, before heading south with the rest
of the Technology sector.  With our $60.75 trigger still
untouched though, we remain in observation mode for now.  QCOM
should find support attain in the $57-58 area and that should
provide a rebound for another run at resistance.  Optimal entries
will be found on the initial breakout over our trigger, while
more cautious traders can wait for a possible pullback and
rebound from the $60 level, as it transforms from resistance to
support.  Clearly, QCOM will need to see renewed strength from
the NASDAQ in order to make that assault on resistance.

Picked on February 17th at   $59.55
Change since picked:          -0.76
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     8.41 mln
Chart =


---


Renaissancere Ltd - RNR - close: 51.32 chg: -0.13 stop: 49.50

For the first time in days we're starting to see some weakness
(a.k.a. profit taking) in the IUX insurance index.  After being
such a leader in the market, hitting new high after new high,
traders are taking some money off the table.  Shares of RNR have
not been immune and after the Monday-Tuesday rally RNR has pulled
back to its 10-dma.  If the weakness in the IUX persists we could
see the index test its 21-dma near the 320 level.  That might
suggest that RNR could test the $50.00 level of support.  We'd be
patient before initiating new positions and look for the bounce
from $50.00.

Picked on February 15 at $50.83
Change since picked:     + 0.49
Earnings Date          02/03/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =



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

RJ Reynolds Tobacco - RJR - cls: 59.73 chg: +0.36 stop: 57.50

Company Description:
R.J. Reynolds Tobacco Holdings, Inc. is the parent company of
R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco
Company, Inc. R.J. Reynolds Tobacco Company is the second-largest
tobacco company in the United States, manufacturing about one of
every four cigarettes sold in the United States. Reynolds
Tobacco's product line includes four of the nation's 10 best-
selling cigarette brands: Camel, Winston, Salem and Doral. Santa
Fe Natural Tobacco Company, Inc. manufactures Natural American
Spirit cigarettes and other tobacco products, and markets them
both nationally and internationally.
(source: company press release)

Why We Like It:
We're going to add RJR to the call list both on its developing
bullish technical picture and as a defensive play if the markets
continue to slip lower.  Technicals are turning bullish as the
stock builds on its trend of higher lows and consolidation under
resistance in the $60.00-60.50 level.  RJR is also a defensive
play based on its recession proof products and 6.4% annual
dividend.  We're going to use a TRIGGER at $60.51 to open the
play.  This should be a clean breakout above the recent highs.
If we're triggered we'll use a stop loss at $57.50 but more
conservative traders can probably get away with a stop under the
50-dma (near 58.50).

RJR made some headlines recently when management stated their
proposed merger with British American Tobacco's Brown and
Williamson unit should close this summer.  Together RJR, the No 2
U.S. tobacco company, and Brown and Williamson, the No 3 tobacco
company, will form to become Reynolds American.  They hope to
compete more efficiently with their much larger rival Phillip
Morris, owned by Altria Group (MO).  Currently the merger is
still under FTC review.


Suggested Options:
Looking over the March and May options we like the 55 and 60
strikes but our favorite is the March 55's.

BUY CALL MAR 55 RJR-CK OI= 202 at $5.10 SL=3.00
BUY CALL MAR 60 RJR-CL OI=1585 at $1.35 SL=0.65
BUY CALL MAY 55 RJR-EK OI= 722 at $6.00 SL=4.00
BUY CALL MAY 60 RJR-EL OI=2995 at $2.90 SL=1.50

Annotated Chart:



Picked on February xx at $xx.xx <-- see trigger
Change since picked:     + 0.00
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       699 thousand
Chart =



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

Avid Technology - AVID - close: 40.07 chg: -1.82 stop: 44.36

The early morning strength quickly faded for AVID and the stock
moved lower in a steady decline the entire session.  Shares
actually pierced support at $40.00 before bouncing off its lows
in the last 30 minutes.  Volume was strong at 1.2 million shares,
which is twice the norm.  We might expect an oversold bounce from
this round-number level at $40.00 but overall the bearish trend
has held.  We're going to lower our stop loss to 43.40.  Short-
term traders can begin to plan their exits as AVID approaches our
first target near $38.00-38.50.

Picked on February 04 at $42.87
Change since picked:     - 2.80
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       612 thousand
Chart =


---

3M Company - MMM - close: 79.10 change: -0.56 stop: 82.50

It hasn't really gotten moving with any conviction, but we
certainly like the way MMM has been steadily losing ground all
week.  The drop at the end of the day on Thursday looks
encouraging, as it has the stock closing back under the 100-dma
($79.32).  We may be a bit premature here, but with daily
oscillators now tipping over in solid bearish fashion, it looks
like this break of the 100-dma should see more follow-through
than the one earlier in the month.  Trader that have been
shorting the failed intraday rallies have gotten the best
possible entries into the play so far and momentum traders are
eagerly looking for a break below $77.50 to join the party.
Maintain stops at $82.50 until we get that print at $77, which
will issue the PnF Sell signal.

Picked on February 15th at    $79.68
Change since picked:           +0.64
Earnings Date                1/20/04 (confirmed)
Average Daily Volume =      2.74 mln
Chart =



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

Cognizant Tech. - CTSH - close: 46.86 change: +2.37 stop: 42.75

Company Description:
Cognizant Technology Solutions Corporation delivers full
lifecycle  solutions to complex software development and
maintenance problems that companies face as they transition to e-
business.  These information technology (IT) services are
delivered through the use of a seamless on-site and offshore
consulting project team.  The company's solutions include
application development and integration, application management
and re-engineering services.  Among CTSH's prominent clients are
ACNielsen Corporation, ADP, Inc., Brinker Int'l, Computer
Sciences, The Dun & Bradstreet Corporation, First Data
Corporation and Nielsen Media Research.

Why we like it:
There's no arguing the fact that shares of CTSH have had an
amazing run over the past year, first clearing its highs near $25
and then steadily working higher in a steady rising channel.
That run came to an end at the same time as the bullish run in
the overall NASDAQ, as the stock reached the $57 level in late
January.  With weakness beginning to creep into the Technology
market, CTSH fell back towards mild support in the $50-52 area
ahead of its February 10th earnings release.  After the post-
release volatility subsided, the stock resumed its fresh downward
trend and there has been quite the battle going on the past few
days around the 50-dma ($49.65).  The bulls lost that battle
today, with the stock breaking down both below the average and
the $49 support level.  Although price did come to rest on
potential support near $47, that does not look like a level that
will hold.

The PnF chart was already on a Sell signal with the drop in early
February, but today's breakdown reinforces it with another Sell
signal.  Note that the current bearish price target is $40.  That
lines up nicely with historical support near $41, the site of the
December lows.  With potential near-term support at the 100-dma
($46.60) and then again at $45, breakdown entries are definitely
the more aggressive strategy.  Our preference would be for
entries on a failed rebound near the 50-dma, or perhaps as high
as $50, which should now be firm resistance.  Since today'
breakdown appears to have gotten the bearish slide going, there
is really no need to use a trigger on the play.  We'll target a
drop into the $40-41 area and use an initial stop at $53, just
over the 20-dma ($52.77) and 30-dma ($52.58).  That's a wider
stop than we normally recommend, so for traders that elect to
enter on a break of the 100-dma, we would suggest using a stop at
$51.

Suggested Options:
Aggressive short-term traders can use the March 45 Put, while
those with a more conservative approach will want to use the
March 50 put.  Aggressive traders looking for more insulation
against time decay will want to utilize the April strike.  Our
preferred option is the April 45 strike, as it provides more time
until expiration.

BUY PUT MAR-50 UPU-OJ OI= 258 at $4.20 SL=2.50
BUY PUT MAR-45 UPU-OI OI=1222 at $1.75 SL=0.80
BUY PUT APR-45*UPU-PI OI= 757 at $2.65 SL=1.25

Annotated Chart of CTSH:
Chart =



Picked on February 19th at    $47.49
Change since picked:           +0.00
Earnings Date                2/10/04 (confirmed)
Average Daily Volume =      1.24 mln
Chart =



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The Option Investor Newsletter                 Thursday 02-19-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Drugs, Internet and a Cat.
Traders Corner: Getting A Head Start -- The New March Positions
Traders Corner: Subscriber Mail plus my CBOE "sentiment" model


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

Drugs, Internet and a Cat.

___________________________________________________________________

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.
___________________________________________________________________


Forest Labs - FRX - close: 72.90 change: -1.11

WHAT TO WATCH:  A couple of days ago we mentioned in the
MarketMonitor that FRX was starting to look a bit weak.  The
bullish trend does appear to be in jeopardy as its technical
oscillators have all turned clearly bearish.  If FRX trades under
$72.00 it will reverse its current P&F chart into a sell signal.
However, before you start planning any short trades be aware that
the 50-dma may be support as should the $70.00 region.  A break
down under either may suggest a test of the gap from January.

Chart=


---

Netease.com - NTES - close: 48.45 change: -3.01

WHAT TO WATCH:  Aggressive players can keep their eye on NTES.
This Chinese Internet stock soared yesterday after announcing
earnings.  Today's 5.84% loss is only a 38.2% retracement of
yesterday's rally.  The close under $50.00 may be a concern for
bulls but the daily chart appears to be building a reverse head-
and-shoulders pattern.  Entry points for longs could be a bounce
from the 200-dma (near 45.00) or a move above yesterday's high
near $52.00.

Chart=


---

Caterpillar - CAT - close: 78.53 change: -0.38

WHAT TO WATCH:  We're still watching this Dow component for a
move over the $80.00 level and its 50-dma (80.81).
Unfortunately, today marked its second failed rally at $80 in
three days. The stock could be building a bear flag.  If it
breaks the $77.00 level aggressive traders could go short with a
tight stop.  The rest of us might want to wait for a breakdown
under $75 to consider shorts.

Chart=


---

Bard C.R. - BCR - close: 93.63 change: -0.45

WHAT TO WATCH:  The profit taking in BCR has been rather mild
considering its extensive run up over the past several weeks.
While we're tempted to consider buying a dip to $90.00 its
technical oscillators are producing some concerning divergences
that may portend a deeper correction.  Both bulls and bears will
be watching this one as it approaches what should be support in
the $87.50-90.00 region.

Chart=



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

WAG $34.95 +0.26 - Walgreens has been consolidating sideways
between 33.50 and 35.25 for several weeks in a row.  Today's high
hit the 50-dma.  A move over 35.25 looks like a bullish trigger
for patient investors.

GDW $109.85 +1.80 - GDW has been a common candidate on the watch
list.  The stock has broken out over resistance at $105 and
reached the $110 level.  Bulls might want to watch for a dip back
to the $105-106 region to consider new positions.

PII $82.30 -1.12 - PII is rolling over again after several days
of trying to crack the $85 level.  $80 looks like its next stop
but bears might target the 200-dma.

ERES $29.74 -2.65 - The sell off in ERES really began to pick up
speed this afternoon.  The close under $30.00 and its 50-dma is
very bearish and traders can probably target a move to the $25.00
region.

EBAY $68.43 -0.09 - As mentioned in the MarketMonitor today bulls
will want to keep an eye on EBAY for a breakout over the $70.00
mark.  Although currently shares look headed toward the $68.00
level.


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

Getting A Head Start -- The New March Positions
By Mike Parnos, Investing With Attitude

This isn’t a democracy!  But I’m a reasonable guy.  So, I will
acquiesce to the request of the masses.  That means that I have to
get off the couch and it’s not even a commercial.

Many CPTI students have requested that we post the March positions
in my Thursday column because it will likely bring in more
premium.  Even though we’ll be exposed for an extra few days, it
does make some sense.  So, let’s get the road on the show.

To get even, I have something that I think (and hope) will drive
you a little crazy.  Read about it later on in the column.
__________________________________________________________

New March CPTI Positions

Position #1 – OEX Iron Condor – 566.06
Sell 12 OEX March 595 calls and buy 12 OEX March 605 puts for a
credit of about: $.45 ($540).
Sell 12 OEX March 540 calls and buy 12 OEX March 530 puts for a
credit of about: $.75 ($900).
Total net credit of $1.20 ($1,440).  Maximum profit range: 540 –
595.  Maintenance:  $12,000 less $1,440 = 10,560.

Position #2 – RUT (Small Cap Index)  Iron Condor – 582.59
Sell 8 RUT March 610 calls and buy 8 RUT March 620 puts for a
credit of about $1.55 ($1,240).
Sell 8 RUT March 550 puts and buy 8 RUT March 540 puts for a
credit of about $1.20 ($960).
Total net credit of $2.75 ($2,200).  Maximum profit range: 550 -
610.
Maintenance: $8,000 less $2,750 = $5,250.

Position $3 – MNX (Mini-NDX Index) Iron Condor - $148.48
Sell 20 MNX March $157.50 calls and buy 20 XAU March $160 puts for
a credit of about $.45 ($900).
Sell 20 MNX March $142.50 calls and buy 20 MNX March $140.00 puts
for a credit of about $.45 ($900).
Total net credit of $.90 ($1,800).  Maximum profit range: $142.50
- $157.50.  Maintenance: $5,000 less $1,800 = $3,200.

Position #4 – BBH (Biotech Index) - Siamese Condor - $143.42
Sell 10 BBH March $145 calls and sell 10 BBH March $145 puts for a
credit of about $6.95.
Buy 10 BBH March $160 calls and buy 10 BBH March $130 puts for a
debit of about $.70.
Total net credit of about $6.25 ($6,250).  Our profit (safety)
range is $138.75 to $151.25.  These are also our bailout points.
The closer BBH finishes to $145, the more money we will make.
_____________________________________________________________

Those Friendly Reminders
February is a five-week option cycle.  The premiums quoted on the
above educational trades are based on Friday's closing bid/ask
prices.  On Tuesday the premiums will likely be different due to
market movement and/or the additional three days of time erosion.
In a few instances, when the bid/ask spread is wide, we figure you
may be able to shave off a nickel here and there.  Be careful.  If
a stock gaps up or down, it may change the entire dynamic of the
trade.  Don't skydive without a parachute.  Just because you have
a pulse and evidence of brain activity doesn't mean you’re a
trader.  And make sure you thoroughly know the intricacies of a
strategy before you trade.  The money you save may be your own.
____________________________________________________________

FEBRUARY CPTI POSITIONS

Position #1 -- OEX – Credit Spread Boogie – 566.06
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.  Closed trade for $.35 ($105).
Profit: $1,935.

Position #2 – MNX (mini NDX index) – Iron Condor – 148.48
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 end up “skewing” us.come back to bite
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.  Closed trade @ $.20 ($400).  Profit:  $1,000.

Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $100.24
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) - $104.75
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 is 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.  Closed trade @ $.20 ($200).  Profit: $1,000.
____________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $36.94
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 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.
March: Mar. $34 calls and $37 puts – credit of $1,150.
Total credit: $7,300.

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.

ZERO-PLUS Strategy.  OEX – 565.92
In the Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
that will mature in seven years at a value of $100,000.  In
essence, that guarantees the principal $100,000 investment.  We
are trading the remaining $26,000 to generate a “risk free” return
on the original investment.

We bought 3 OEX Jan. 2006 540 calls at a cost of $24,300.  Then we
sold 3 OEX March 2004 585 calls for a credit of $930.  We also put
on a bull put spread, selling three OEX March 535 puts an buying
three OEX March 525 puts for a credit of $330.  Our total credit
is $1,260.  Our current cash position is $2,960 ($1,260 plus the
unused $1,700).  This one is going to drag on for seven years, so
get comfortable.  We’re going to make some money.
_____________________________________________________________

Let Me Drive You Crazy
Subject:  Reflex motions
While sitting at your desk, lift your right foot off the floor and
make clockwise circles.  Now, while you’re doing this, draw the
number “6” in the air with your right hand.  Your foot will change
direction and there’s nothing you can do about it.
______________________________________________________________

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

Subscriber Mail plus my CBOE "sentiment" model
By Leigh Stevens
lstevens@OptionInvestor.com

OIN SUBSCRIBER QUESTION:
Glad you're back. Can you explain in more detail your statement
in the QQQ analysis Sunday: "The volume trend is still bullish –
 QQQ is not at an overbought extreme. More market action is
needed to resolve this pattern" What level would be extreme?

ANSWER:
Well, I suppose first I ought to first say something – which I
didn't get into in my Sunday Index Trader Wrap – about how daily
trading volume action was being consistently with the price
trend.

The thing that is said about stock volume is that it should move
in the same direction as the trend. In an up trend, volume should
on balance increase (expand) on upswings and contract (fall off)
on downswings.  This type action then means that volume is
"confirming" the price trend.

You can see this in the QQQ price/volume chart below, helped by
the up or down sloping trendlines that I have drawn above and
below price and volume action-




Basically, volume expanded steadily on the January advance and
was in a declining trend in the February downswing.

As to the Q's being at an "overbought" extreme, the 14-day
stochastic got down to an oversold reading around the time that
the Nas 100 tracking stock fell to the low end of its uptrend
channel recently.  However, the overbought and oversold
measurements are relative to the time frame being measured.

If we look at weekly chart of QQQ, we will see a different story
by use of the weekly RSI (Relative Strength Index) Oscillator set
at 13, meaning it is calculating a 13-week span for the high and
low during that period versus the ratio of up closes to down
closes. See this chart below –




On a weekly chart basis, the recent peak was at an overbought
extreme in that QQQ got to reading above 70.  It may not be a top
and the (price) pattern is still bullish, but this relatively
high RSI reading is at least suggesting that the Nasdaq top
stocks are vulnerable to a downturn, such as on any negative
market/economic news.  Also, the recent peak is hitting possible
resistance suggested by the back that the stock has retraced 62%
of the fall from a peak in May 2001 to the low in Q4 in 2002.

Time will tell as to whether the market has reached an extreme
and will start to fall off.  So, far the price trend is still
very much intact and you can see prices moving higher within an
untrend.  If there is going to be a correction, say back to
support in the 34 area, it should happen soon I think and this
will cause the RSI to fall back to a more "neutral" reading.

A long answer to a short question, but worth going into to show
how these technical type indicators get used.


ANOTHER WAY TO MEASURE MARKET "EXTREMES" –

A measure of market "sentiment" I use to see if the market is
getting overheated or just the reverse is by examining the daily
volume of option put volume relative to call volume - a
"standard" measure is the so called put/call readings. This is a
ratio of total put volume to call volume, such as on the CBOE
(Chicago Board Options Exchange) alone or all options exchanges
together.

Put volume any given day for both (individual) equities AND
index options is compared and is (usually) a fractional number -
for example, .75, indicating that put volume was 75% of call
volume.  If the put/call reading was 1.00, put volume equaled
call volume that day which doesn't happen all that often.

Total daily index and equities options put volume is divided
by total daily call volume.  You can check this number all
over the place, such as on the CBOE web site (www.cboe.com)
or in charting programs like Q-Charts – their symbol being
"QC:PUTCALL" I believe.

Why use Option Volume Ratios?
It has been noticed that when put volume gets quite high,
such as being equal to call volume, traders are getting
pretty bearish  - and traders are "closest" to the market so
to speak, day in and day out.  If in the case of a put
volume being high, the market may be at or approaching an
"oversold" extreme in terms of how traders feel about the
market – bullish or bearish, which way are they trading.

Obviously how bullish or bearish option traders are is best
shown by where they are putting their money - more
into calls or into puts and what is the trend of that.
Selling calls should not be considered a bullish play just
as selling puts can be a bullish play.

Nevertheless, the majority of option traders are betting on
market direction, so call volume goes up on rally phases and
put volume increases substantially in declining markets.

I talked before about how Charles Dow, back more than a 100
years ago, observed that at significant market tops most
market participants are bullish and at market lows many were
shorting stocks, or they were out of the market – no options
then!

Dow started writing about the idea that if there is
especially heavy buying or heavy selling, the market could
be nearing a trend reversal and something contrary to the
trend was about to happen when everyone was heavily betting
on one direction or the other for the market.

The concept of "contrary opinion" sort of started with Dow
and that extremes in bullishness are bearish and bearish
extremes in trading are bullish. I used to think of Alice in
Wonderland! when I think of how this is.

PUT/CALL RATIO - THE CONVENTIONAL WAY
When put/call ratios have gotten down to the .40 to .45
area, this is seen to mark a bullish extreme and caution is
indicated as to the FURTHER prospects for much more of a
rise.  When put/call ratios have gone to or above about .90,
this is considered to be a sign that there is excessive put
buying and bearishness – which may signal an upcoming
reversal.

However, this indicator (put/call ratios) tends to
be EARLY and well ahead in "signaling" a trend change. Buy
or sell points are often in fact 1 to as many as 5-6 trading
days ahead of an actual top or bottom.

The other thing that can make the put/call standard way of
measuring market extremes tricky is the effect of
index calls and index puts in the total option volume
figures.  There is a lot of hedging by money managers and
hedge funds that goes on and this can be related more
to that (hedging) than simply how individual traders see the
market.

As many of you know, I have found it useful to keep up my
own way of measuring option volume numbers.  For example, I
only look at daily equities option volume numbers.

I tend to get a more pure measure of bullish
or bearish trader "sentiment" this way. I also come up with
an indicator that way that is more like the other
overbought/oversold indicators like stochastics and RSI I
talked about at the start of this piece.  A LOW number is
suggesting a possible "oversold" market and a high reading
is indicating an "overbought" market.

I always say to notice the ORDER of how I say that I use a
CALL/put indicator and it takes OUT Index option volume –
this is not the PUT/call ratio that divides put volume by
call volume and includes the Index options.

I keep this radio plotted below say an OEX chart by being
able to put a "custom" data item into my TradeStation
software – there are other ways of doing it too.  I used to
plot it my hand even.

My Call Put indicator as of the close today, Thursday, Feb.
19 (2004) is seen below with the S&P 100 chart. I think it
is pretty self explanatory in that you can see the extremes
and how I have the lines suggesting where this daily ratio
is suggesting an extreme – similar to saying a market may be
overbought or oversold.




There was definitely a warning of this first top (around 572) in
the OEX by how much equity call buying there was on a couple
different occasions.  The second top that has formed recently, at
least so far, has come with only a milder amount of equities call
buying relative to put volume.  There was a recent reading at the
beginning of this week's trading (Tuesday) that was bullish in
the way I measure it.  However, the price pattern looks like
formation of a possible double top, so we have to see how this
plays out.  First and foremost is price action – what's the
trend.

The key to the readings of this indicator is, and you'll notice,
that readings at or above about 2.4-2.5 have tended to mark at
least temporary tops and they occurred within a day or a few
days.  I also do look at a 5-day moving average of the call
to put equities option ratio which is the magenta line, but I
rely on single one day numbers at the extremes – I don't wait for
a moving average confirmation.

We don't often see these extreme readings, but when they do, it's
like saying "ready, get set, go" – time to be watchful for a
trend reversal in the coming day or up to about 5 trading
sessions or a week.


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