Option Investor

Daily Newsletter, Thursday, 02/26/2004

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The Option Investor Newsletter                Thursday 02-26-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Battle For Control
Futures Markets: CRB Breakout
Index Trader Wrap: Lots to cover, so lets get started
Market Sentiment: Less Bullish

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      02-26-2004           High     Low     Volume   Adv/Dcl
DJIA    10580.14 - 21.50 10612.14 10539.33 1.77 bln 1994/1220
NASDAQ   2032.57 +  9.60  2037.17  2012.83 1.76 bln 1944/1236
S&P 100   565.49 -  0.37   566.99   563.08   Totals 3938/2456
S&P 500  1144.91 +  1.24  1147.23  1138.62
W5000   11162.14 + 28.50 11177.06 11088.70
RUS 2000  583.86 +  4.82   583.86   576.58
DJ TRANS 2891.78 + 22.80  2892.76  2861.22
VIX        14.83 -  0.01    15.33    14.69
VXO (VIX-O)14.65 -  0.34    15.59    14.59
VXN        23.10 -  0.45    24.14    23.07
Total Volume 3,800M
Total UpVol  2,552M
Total DnVol  1,169M
Total Adv  4439
Total Dcl  2776
52wk Highs  350
52wk Lows    12
TRIN       0.93
PUT/CALL   0.64

Battle For Control

The fight for leadership continues to keep the markets in
their recent ranges as mixed indexes and sector rotation
proceeds on low volume. The Dow closed down while the Nasdaq
stretched its gains but the real heroes were the Russell and
the SOX. Small cap techs continue to rebound from the weeks
of profit taking but they are still struggling to swim
upstream weighted down by heavy blue chips.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off negative with the Jobless Claims
rising to hit the 350,000 level again and helped to increase
the rising fear that jobs are not improving. We will get the
nonfarm payrolls for February next Friday and with the rising
claims the odds are good we are not going to see a strong
bounce in payrolls. What we appear to be seeing is a mild
reduction in individual layoffs but no real pickup in hiring.

The Monthly Mass Layoffs announced on Wednesday rose to highs
not seen since Dec-2002 and was the second month of strong
increases. The January layoffs at 239,454 was a +25% jump
over December and a +73% rise over November. These are very
strong jumps and suggest the corporate world is still doing
some belt tightening. AT&T announced 4600 job cuts yesterday
and Apple announced an undisclosed number of layoffs in their
education unit as well.

The Help Wanted Index rose one point to 38 for January but
this is not significant as the index has been moving between
37-39 for the last year. Still no pickup in advertising for
new jobs. This could be seen as confirmation that the payroll
number next week could be weak.

The most negative number for the day was the Durable Goods
Orders which fell -1.8% for January. Fortunately the December
number at +0.0% was revised up to +1.6% which blunted the bad
news for January. For the last three reporting months we had
-2.4% in Nov, +1.6% in Dec and -1.8% in January. You can
quickly see we are averaging a drop of nearly -1.0% for the
last three months. Computer products dropped -2.1% in January
and aircraft and motor vehicles fell -10.2%. If it were not
for a giant +73.3% gain in communications equipment, the
largest gain since 1997, the headline numbers would have
been seriously deficient. The shipment component was flat
and back orders fell for the first time in six months. This
was not a good report and all eyes will be on the ISM
release next week for more current info.

January New Home Sales fell to 1.106M and the lowest level
since May-2003 but the culprit as we know was the weather.
The pace is still strong despite the drop and once the
spring weather appears I suspect sales will return.
Inventory has risen to a 4.1-month supply and with rates
close to hitting six month lows again that inventory should
be sold quickly this spring.

Toll Brothers reported a +10% gain in profits today and
said it saw no signs of slowing demand so far in February
despite the bad weather. They said results were impacted
by the weather which delayed completions and scheduled
closings. Obviously these will catch up once the sun
returns. TOL projected +20% revenue growth for 2004.

PeopleSoft got a reprieve today when the government said
it would file suit to block the Oracle takeover as anti
competitive. Larry Ellison has threatened to sue the
government if the deal was blocked and it looks like he
will get his chance. Once the ruling was announced BEAS
spiked upward on the rumor that a failed takeover try of
PSFT would have ORCL looking for other targets.

DNA got approval for an anti cancer drug that is supposed
to add five months to the life expectancy of colon cancer
patients. In anticipation of this approval the stock has
surged from $40 to $98 and an increase of $30 billion in
market cap. The stock surged on the approval today from
$98 to $103 adding even more to the market cap increase
for this one drug. IF this was going to be a blockbuster
like Viagra or Prilosec if would have to apply to a larger
segment of the population than just colon cancer patients.
I find it hard to believe this gain will stick and I believe
you are looking at the Editors Play for Sunday. Hint, hint.

The indexes posted a lackluster day of trading on weak volume
and a lack of big cap leadership. The Dow continued to trade
sideways just below 10600 for the fourth consecutive day and
showed no real inclination to fight the status quo. While it
waits for motivation the 50dma continues to rise and was
slightly over 10502 at the close. Instead of the Dow falling
to retest the 50dma support the 50dma is slowly rising to
meet the Dow. This sets up an interesting scenario of a
support test without a drop. Is it a valid retest? That
remains to be seen and at the current rate of ascent and
the weakness in the Dow that touch could come as early as

The Nasdaq closed at 2031 and well over the low for the week
at 1991. That low was only +5 points above the 100 dma and
is close enough for a support test for me. The next real
test for the Nasdaq is the 50dma just overhead at 2048. When
you consider the weakness in the Dow the Nasdaq has been
holding up the markets since Tuesday. Actually it has been
the small cap techs in the Nasdaq that are seeing the new
buying interest.

The Russell and the SOX have been the stars. The SOX has
moved up for three consecutive days and closed just below
510 today. Comments from NVLS and several other chip stocks
have been reinforcing the idea that chip orders are rising
quickly and where the SOX goes the Nasdaq will follow. The
SOX will hit new resistance at 515.

Semiconductor Index - Daily

Russell Chart - Daily

The Russell is in the best shape of any index and is only
14 points below its February high. We had a very successful
test of the 50dma this week with three days of trading on
that support before it launched the current strong move.
The Russell closed exactly on its 10dma today at 583 and
that should be the last line of resistance before a return
to the highs. This is very bullish and if it continues the
little guys could actually drag the blue chips back from
the cliff and trigger the start of the April earnings run.

With the exception of the Dow all the major indexes have
been improving slightly as the week progresses. The Dow
would be taking part in the rebound if it were not for
three stocks. In the last four days UTX has dropped from
$97 to today's low of $89 and impacted the Dow to the tune
of -60 points. Boeing dropped to $42 from $45 for another
-21 Dow points. MMM fell from nearly $81 to $78 for -21
Dow points. That is only three stocks that have accounted
for over -100 Dow points over the last four days and the
Dow closed today only a handful of points below Monday's
close. The Dow has taken the whipping and held its ground.

Tomorrow the challenge will be the GDP revision at 8:30.
Estimates are for a drop to +3.6% from the initial estimate
of +4.0% last month. Nobody expects a material revision
but you never can tell. Also out on Friday is the Consumer
Sentiment, Chicago PMI and the NY-NAPM. Considering how
the recent economic reports have been all over the map
we can't count on these reports being business as usual.
There is always a risk that some number will stray from
the acceptable norm.

Friday is also month end and the next three days are
historically bullish as window dressing and month end
cash flows push stock prices higher. Traders looking
for a bounce to lighten the load are probably looking
at the next three days for that purpose as well. We are
still in a consolidation period and until the indexes
start pushing away from the averages and venturing out
toward the recent highs there is not going to be much
excitement. Trading this week has been very boring and
interspersed with only a few random program trades to
wake traders up. Volume has been very light with the
last two days trading less than 3.8B shares across all
markets. We were hitting 5.2B when the markets were at
their highs. After Friday we will be two thirds of the
way through the quarter and traders will probably start
thinking about positions for Q1 earnings. They will
probably not enter those positions until after the
Employment Report next Friday. Nobody wants to make a
big bet only to have it blow up on them with a negative
jobs report.

I am still in "buy the dip" mode and so far it is working
fine. Last Thursday I told you to expect some bargain
hunting opportunities this week and the dip played out as
expected. The Nasdaq stopped its drop at 2000 and the SOX
and Russell both rebounded from textbook tests of support.
I am not ready to sound the charge yet but I do think we
are getting close.

Enter Passively, Exit Aggressively.

Jim Brown


CRB Breakout
Jonathan Levinson

The US Dollar Index rose, but so did commodities, with the CRB
breaking to 20 year highs.  Gold and foreign currencies declined
as silver advanced, treasuries fell and equities were mixed.

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 rose in overnight trading, whipsawed
violently with the morning releases of economic data, and wound
up virtually unchanged for its trouble, holding its overnight
gains and trading at 87.69 as of this writing.  Despite this
strength, the CRB broke to multidecade highs above 273, led by
cocoa, cotton, natural gas, copper and coffee futures.  I had
difficulty reconciling the action of the CRB with the words of
Fed Governor Bies this afternoon: "...Briefly putting on my hat
as a monetary policy maker, I will say that the prospect of a
strongly growing economy, falling unemployment, and low inflation
seems to be close to a central banker's ideal..." but then, I'm
not a central banker.

The US Dollar rose right to triple top resistance in the 88 area
on the daily chart, failing at the upper Bollinger band currently
located at 88.14.  The daily cycle upphase continues, but with
strong confluence from 88 to 90, dollar bulls have their work cut
out for them from here.

Daily chart of April gold

Prophetcharts did not update its current futures chart tonight,
and so today's daily price candle is not shown at all.  If it
were, it would display a red doji hammer, top at 397.80 and
bottom at 391.20, with the candle body at 395-396 and closing
price at 395.60, -1.30 for the day.  I apologize for the
inconvenience, and have reproduced yesterday's chart to keep
current with the support, resistance and trendlines.

April gold low of 391.20 broke recent support at the low but
bounced back above 392 support.  This move set a lower low and
lower high for gold, further confirming the daily cycle
downphase.  The doji reversal does set up a possible price
bottom, but until we see the ongoing downphase end, it's simply
wishful thinking.  Next support is at 388, and goldbugs need that
level to hold on further tests in order to entertain the
possibility of an early end to the current downphase.  Just as
the 88 level is the start of significant resistance for the USD
Index, so is 388-91 the start of significant support for gold
futures.  For the day, HUI added .63% to close at 223.06 and XAU
gained .69% to close at 99.07.

Daily chart of the ten year note yield

Ten year note yields (TNX) rose 3.1 basis points to close at
4.046%, a .77% change on the day.  The bounce from our pennant
support line gave us the first twitch of a buy signal on the
bottoming daily cycle oscillator.  This was a very bearish day
for bonds, despite the 5B net add from the Fed via its open
market desk.  Resistance just below 4.08% is imminently
approaching, and bond bulls should be defending that level

Daily NQ candles

The NQ had a very good day, recovering from a spike low
commencing shortly after the release of the 8:30AM economic data,
bouncing to a higher high over yesterday's close, and the
settling into a range to close higher by 4 points at 1476.  While
the daily cycle downphase did not suffer any setback from the
nominally higher high, the Macd histogram appears to be building
a higher low against the lower price low, and if bulls can simply
hold at or above current levels, we'll have steep bullish
oscillator divergences begin to develop.  A break above 1492
would likely halt the current daily cycle downphase, but it will
take a break north of 1502 before we can contemplate an early new
upphase on this timeframe.  In short, the general downtrend
associated with the current oscillator downphase is still intact,
but another day like today could threaten it.  Bulls need the
1460 level to hold here.

30 minute 20 day chart of the NQ

The downdraft discussed last night happened right out of the
gate, but the uptrend that has brought us a pattern of rising
oscillator and price lows asserted itself again.  The lower
rising wedge support line was broken in what proved to be a
beautiful throwunder / whipsaw, and the morning recovery brought
the price back to and over the scene of the crime.  That
divergent spike notwithstanding, the bear wedge formation remains
intact, and until a decisive break above in the 1486 area, bulls
need to be attentive the risk of a break back to the 1450 area.
The 30 minute cycle oscillators peaked at the cash close, and
traders with no appetite to get whipsawed in the apex of the
wedge can look for a break below 1470 or above 1486.  To the
upside, there's next resistance at 1492, and support below at
1460, 1455 and 1450.

Daily ES candles

Selling in the last 15 minutes wiped out the bulk of ES' gains
for a close +.5 at 1143.50.  The move resulted in a doji star,
with traders exhibiting an equal degree of dissatisfaction to the
upside as to the downside.  As with the NQ, the higher high and
fractionally higher low caused that slight upward twitch in the
Macd, and hints that a failure to break the rising trendline in
the 1130-36 area will abort the current daily cycle downphase and
give bulls a higher stochastic low to celebrate.  The daily cycle
downphase along with its corollary price slope are still intact,
but bears need to do some aggressive selling very shortly if they
wish to avoid new rally highs on the subsequent cycle upphase in
this timeframe.  Support moved to 1138, but 1130-36 is one big
confluence zone, and so long as 1118 holds, bulls are sitting
comfortably within the broad ongoing uptrend.

20 day 30 minute chart of the ES

The rising wedge seen on the NQ is evident here on the 30 minute
ES as well, as is the downtick in the 30 minute oscillators as of
the cash close.  Until the apex breaks, traders need to careful
of getting whipsawed in a narrowing range.  A downside break of
1143 or upside break of 1149 are the first targets, but 1141 and
1151 are support and resistance just below.  This "insulated"
wedge appears maximally treacherous to me, and anyone who
disagrees need only note the false breakout this morning and the
sudden, rapid rise once the broken trendline was regained.

We discussed a head and shoulders top forming here, and while
today's prints cost the pattern some of its symmetry, the
formation is still valid with a neckline between 1133 and 1136.
A 20+ point range targets our magically recurring level of 1115,
which is becoming the maginot line between bull and bear
territory on the ES.

150-tick ES

The afternoon range was sufficiently narrow to divide the short
cycle oscillators, diminishing their predictive capacity.  The 30
minute cycle stopped advancing and went flat at the close,
coinciding with the downtick at the top of the 300 minute
stochastic's range in the previous chart.  If this is indeed a
top in the 30 minute cycle channel, then we can expect more chop
on the short cycle, but it should produce a pattern of lower
highs as (and if) the 30 minute cycle downphase develops.

Daily YM candles

YM dropped 26 points to close at 10572, the weakest index again,
losing .25% for the NQ's .27% gain.  Support came at 10533 today,
resistance at 10610.

20 day 30 minute chart of the YM

The US Dollar Index rose today, gold sold off but recovered much
of its losses, the miners and the CRB closed in the green,
treasuries declined and equities were mixed.  These intermarket
relationships appear to be growing more instead of less confused.
For traders, that means that the trends on which they've relied
for determining primary direction are no longer reliable.  For
scalpers and daytraders, it likely makes no difference, while
longer term swing and position traders need to be careful.  The
indices were lined up to the downside last night, and the
expected breakdown occurred, but the bounce from the morning lows
came almost out of nowhere, with only the short cycle intraday
indicators giving warning.  When moves such as that occur,
traders need to act first and wonder later.  Trailing stops or an
itchy exit finger, whatever works, but don't let your view of
what "should" occur blind you to what is occurring.  Trade what
you see.


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Lots to cover, so lets get started

Tonight I'm going to spend some needed time on the NASDAQ's
market internals, and this is going to take up some precious
time.  But time I think well spent.

So let's cut to the chase in get down to business.

Here's a quick look at today's closing internals, and hourly
price action.

Market Snapshot / Internals - 02/26/04 Close

For a second-straight session, advancers were able to outnumber
declining issues.  During the last hour of trade, we might note
that we saw a pretty good build of new highs, while during the
mid-part of the session, we saw more of a slow and steady build.
Is this a sign of eager bullish anticipation, or a late session
bout of short covering, where some aggressive bears may have
shorted some stocks that looked overextended and had just set a
new 52-week high at this morning's open, and thought that we
might see a good washout to the downside in today's trade, on the
weaker January durable goods data?  We'll never know, but looks
like some sign of bullish leadership presenting itself late in
the session.

NASDAQ Composite Index (COMPX) - Daily Intervals

I've placed BLUE retracement brackets on my current study period,
where I think we are seeing similar technicals that were present
from mid-July to mid-August of last year.  Both declines have
seen a very identical 7.6% decline.  Both declines saw the very
broad NASDAQ Composite fall below its 21-day SMA and 50-day SMA,
where we now look for strength back above these short and
intermediate-term moving average, while at the same time looking
for support above Tuesday's intra-day lows.

If there is one difference I do see today, compared to the July-
August decline of last year, is with respect to the downward
trends.  I "cloned" the PINK downward trend from the then 07/14
high to the 07/31 relative high, and placed it on the current
NASDAQ Composite high, where we can make a comparison to the
current downward trend in RED, where this comparison gives the
observation of a steeper, or greater velocity of decline, that a
bullish rally will have to face.

I've used retracement brackets in a conventional manner, where
anchor points of my study periods are from a high, to a pullback

I would have to say the mid-August advance was rather powerful as
the COMPX NEVER closed back below on of its retracement levels,
after moving above one of the levels.

I again added the observation of 2,000 and 2,100 levels, where
the pullback test did find support at 2,000.  A good test for
further strength looks to be a bullish break of 2,053, and from
there, strength back above 2,100.  It's notable how the CURRENT
retracement, even though anchored at a low of 1,991.05, would
have had the 61.8% retracement being some type of key level of
resistance at 2,091.64 before the recent low was found.  I would
have to think that a bullish trader/investor currently playing
this bounce, and using the NASDAQ Composite Index as one of their
guides, would think a MAX bounce target from here would be that
2,090-2,100 area.

That's the bullish view.  Now what is a bear thinking?  He/she
has got to be thinking about that 2,000 level as support, and
probably looking over his/her shoulder at the 2,100 level as a
current risk assessment level.

What may also be important to note is the upward trend I've shown
in GREEN, that does look to be in play.  If measured from the
October low, this trend is nearly 5-months old, while the
downward RED downward trend is considerably younger at just 5-
days old.  Older trends should be deemed more powerful than
younger trends until broken.

So that is a quick look at the OUTSIDE of the NASDAQ Composite.
I want to also look for SIMILARITY or DIVERGENCE to my test
period, but now look at the INTERNALS.

NASDAQ Market Internals - Comparison to mid-August 2003

Due to vertical axis limitations, I've split my internals study
period into two parts, where the thick BLUE horizontal line
divides the then and now study period.  Row 138 is the beginning
of my benchmark, where the first chart of the NASDAQ Composite,
would have July 31, being the attachment of downward trend, where
current study period (row 278) and February 19, is also the
attachment of current downward trend.

What I now focus on is internals at the COMPX lows (rows 144 and

Note how SIMILAR both the NDX and COMPX bullish % data are
(columns G and H).  The BIGGEST concern I have for a BULL right
now is that the NDX and COMPQ bullish % are now in columns of "O"
and not "X" as they were in mid-August!  I've tried to color code
my actual numbers in the above table as RED being down, and GREEN
still being up.  If you look at www.stockcharts.com's FREE
bullish % charts, you will see this more clearly for the bullish
% data.

Note that today's trade did see the NASDAQ-100 bullish % ($BPNDX)
slip further to 61%.  This is DIVERGENCE to the past, and
something I/you/we MUST be alert to.

This now has me focusing even MORE on the NH/NL indicators!!!!

A healthy/bullish market CONTINUES to REBOUND from a DECLINE when
BULLISH LEADERSHIP is present.  The measuring of NH/NL
indications is a GREAT tool for measuring signs of continued
BULLISH leadership.

In ratio format as I have calculated, today's trade did see a
JUMP in the DAILY NH/NL ratio (column AD), the 5-day average
(column AE) shows a lesser rate of decline, but still hasn't
turned up and remains below the 10-day average (column AF).

Look at row 148, where I've boxed in BLUE how the 5-day NH/NL
ratio edged above its 10-day NH/NL ratio, and perhaps gave
BULLISH LEADERSHIP confirmation to the reversal.

Current analysis is that we have NOT seen such confirmation, so
BULLS still need to be CAUTIOUS!

Do you sense, like I send, that the recent PRICE LOWS found in
the NASDAQ Composite and NASDAQ-100 become an important technical
level for price support?  This "sense" is based purely on

PRICE always matters the most, so this is the main area of a
trader/investor's focus right now.

However, the internals give VERY important insight into the
HEALTH of the market.  I can NOT say at this point that the
current INTERNALS are showing health, and at this point must
operate under the assumption that what we're seeing in the NASDAQ
is a "relief bounce" and not necessarily a resumption of

Certainly there are some signs of stability presented outside the
bullish % indications, but 2-days of NASDAQ gains shouldn't be
considered an all out super ludicrous rebound in the making.

I would still be more inclined to trade bullish, and using past
history as a guide.  But understand the need for a stop, should
the INTERNALS not confirm the current PRICE bounce that looks to
be underway.

Pivot Analysis Matrix -

I've highlighted in PINK some of today's lows/high for the major
indices that I want to quickly discuss.

The INDU violated its WEEKLY S1 by about 10-points, then
rebounded, but once again seemed to lag, or doesn't show the type
of leadership it had been showing in prior weeks.

The NASDAQ-100 Tracker (QQQ), which tends to trade a little
sloppier than the NDX.X did see today's low kiss the WEEKLY S1,
but buyers quickly provided support at that level.  This becomes
a key level for near-term support.

The S&P 100 Index (OEX.X) traded a high of 566.99.  When it did,
I challenged market participants to show their bullishness with a
press above this important near-term level of resistance, where
in today's 01:00 PM EST Update, I showed a 60-minute chart of the
OEX, where that chart was capture just before the OEX traded the
overlapping 566.65 level.  As you can see, the OEX didn't find
enough buyers to outstrip sellers, and remains an important level
of resistance.

The SOX.X traded a session high of 513.57.  I highlight this as
514 kept showing up a couple of weeks ago.  Lets quickly review
the SOX chart.  Remember too the potential head and shoulders top
formation that we discussed in prior wraps.

Semiconductor Index (SOX.X) - Daily Intervals

I think it helpful to not just look at charts with their
WEEKLY/MONTHLY Pivot retracement, but other types of charts.  A
couple of weeks ago I showed a similar chart of the SOX as that
above.  We kept noting how 514 seemed to be showing up in the
SOX, and a conventional retracement attached as shown has 50% of
a December low to recent high marking this 514 level.  Today's
high may well have some market participants trading the above
chart and retracement.  With the head/shoulder top pattern in
play, a trader that shorted 535 that has now found another
relative low is probably shorting this 514 area again.  A quick
check of our PIVOT Matrix also shows the SOX has NOT been able to
see a trade at its WEEKLY Pivot of 517.06.  Consider 514-517 an
area of resistance.

Dow Industrials (INDU) Chart - 60-minute intervals

This 60-minute chart, along with the OEX and QQQ chart shown in
today's 01:00 PM EST really begin to show where near-term
resistance is line up, and where that resistance, if broken to
the upside should find gains to the next level higher.

Just as the INDU fell 10-points below its WEEKLY S1 this morning,
it has not been able to show much strength above 10,610, where
10,600 and the little zone of yellow resistance is at.

I've marked the recent little low of 10,521, which came just a
smidge above the MONTHLY Pivot of 10,520.42 as a line in the sand
for support, and perhaps more negative impact on market
psychology if broken to the downside.

At the same time, with the NASDAQ showing a little life, I would
have to think buying picks up, or bullishness improves, along
with psychology, on a move above the 10,610 level.  How about
10,615.08 and tomorrow's DAILY R1?

Jeff Bailey


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Less Bullish
- J. Brown

Thursday was a lot less bullish than I had expected, at least
considering the major indices closing numbers.  Maybe it was the
disappointing durable goods orders.  The new home sales figures
were actually better than expected.  The NASDAQ did continue its
bounce from Tuesday's low boosted by strength in the networking,
hardware and Internet stocks.  Yet the Dow and the S&P merely
churned sideways.  Looking back this month appears to be living
up to its historical trend for consolidation.

We could still be dealing with a "tired" market.  The DJIA and
SPX really haven't produced a decent correction and traders may
be reluctant to chase stocks here without a clear catalyst to
drive stocks higher.  Fortunately, the big picture for stocks
this year remains positive.  Greenspan's comments yesterday are
bullish for the markets.

Market internals were bullish with advancing stocks outpacing
decliners 17 to 10 on the NYSE and 18 to 12 on the NASDAQ.  Up
volume was about twice as strong as down volume on both

Noteworthy sector moves is a new, almost two-year high for the
biotech index (BTK.X), which was fueled by a $7 run in Genentech
(DNA) after the FDA approved its drug for colon cancer.

The oil index (OIX) has finally broken out above resistance at
the 330 level and the oil services index (OSX) has hit another
new high as oil closes above $35 a barrel.

The DJUSHB home construction index turned in a strong 3.77% gain
today after the better than expected new home sales numbers and
the group looks poised to challenge its all-time highs.


Market Averages


52-week High: 10753
52-week Low :  7416
Current     : 10580

Moving Averages:

 10-dma: 10635
 50-dma: 10502
200-dma:  9659

S&P 500 ($SPX)

52-week High: 1158
52-week Low :  788
Current     : 1144

Moving Averages:

 10-dma: 1146
 50-dma: 1126
200-dma: 1039

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  938
Current     : 1477

Moving Averages:

 10-dma: 1483
 50-dma: 1488
200-dma: 1355


The volatility indices have been crashing the last three sessions
even though the markets haven't been making any huge gains.  This
is a sign of investors confidence and suggests we could see
another move higher soon in the indices.

CBOE Market Volatility Index (VIX) = 14.83 -0.10
CBOE Mkt Volatility old VIX  (VXO) = 14.65 -0.34
Nasdaq Volatility Index (VXN)      = 23.10 -0.45


          Put/Call Ratio  Call Volume   Put Volume

Total          0.64        714,777       460,082
Equity Only    0.52        607,116       316,163
OEX            0.92         16,687        15,408
QQQ            1.80         38,236        69,009


Bullish Percent Data

           Current   Change   Status
NYSE          76.0    + 0     Bull Confirmed
NASDAQ-100    61.0    - 2     Bear Confirmed
Dow Indust.   86.7    + 0     Bull Confirmed
S&P 500       85.4    + 0     Bull Confirmed
S&P 100       87.0    + 0     Bull Confirmed

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

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


 5-dma: 1.15
10-dma: 1.08
21-dma: 1.03
55-dma: 1.00

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1761      1863
Decliners    1063      1184

New Highs     194       132
New Lows        6         6

Up Volume   1103M     1171M
Down Vol.    572M      531M

Total Vol.  1701M     1733M
M = millions


Commitments Of Traders Report: 02/17/04

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 are still stuck in limbo with very little
movement, although the movement this week was bullish.  As is
normally the case small traders moved the opposite direction.

Commercials   Long      Short      Net     % Of OI
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%)
02/17/04      416,148   415,278       870     0.0%

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
01/27/04      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%
02/17/04      141,533    84,227    57,306    25.3%

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

Commercial traders became slightly more bearish last week
with a decent increase in short positions.  Small traders
increased both longs and shorts but overall look a lot
more bullish.

Commercials   Long      Short      Net     % Of OI
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%)
02/17/04      296,313   371,703    (75,390)  (11.3%)

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
01/27/04     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%
02/17/04     144,014     64,391    79,623    38.2%

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


Commercials still aren't making any big changes here but
they did turn slightly more bullish on the NDX.  Small
traders didn't move much.

Commercials   Long      Short      Net     % of OI
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%
02/17/04       46,104     40,385     5,719    6.6%

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
01/27/04       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%)
02/17/04        9,630    12,338    (2,708)  (12.3%)

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02


Minor increases in both shorts and longs for commercial
traders lead to a small up tick in bullish sentiment.
Small traders turned slightly more negative on the Dow.

Commercials   Long      Short      Net     % of OI
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%
02/17/04       24,451    12,907   11,544      30.9%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
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%)
02/17/04        6,768    15,623   (8,855)   (39.5%)

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 02-26-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: APOL, DHR
Dropped Puts: AVID
Call Play Updates: AHC, DHI, PD, QCOM, RJR, RNR, SLB, UNH
New Calls Plays: ATH, RYL
Put Play Updates: CHIR, CTSH, IR, MMM, WGO
New Put Plays: None


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.


Apollo Group - APOL - close: 75.89 change: +0.15 stop: 74.00

The pullback in shares of APOL that was looking like such a great
entry point near $75 took a turn for the worse yesterday.  Fellow
education company ESI admitted that it had received subpoenas and
a search warrant from the U.S. Justice Department and that tanked
the whole sector with APOL plummeting all the way to the 50-dma
near $73 before rebounding today.  While we have to stick with
our discipline and drop the play tonight, this may turn out to be
the next great entry point before the stock runs to new highs
again.  All the same, we'd suggest using any continued strength
to exit open positions tomorrow.

Picked on February 1st at    $77.44
Change since picked:          -1.55
Earnings Date               12/18/03 (confirmed)
Average Daily Volume =     1.62 mln
Chart =


Danaher Corp - DHR - close: 91.03 cls: -0.89 stop: 90.00

Time is up on our DHR play.  We were expecting a test of support
at $90.00 or its 50-dma this week followed by a strong bounce.
What we got was a broken 50-dma and a dip to $90.29.  When buyers
failed to follow through on the bounce from this low and DHR
produced another lower high we decided to cut our losses.  Shares
look ready to test the $90 level again.

Picked on January 30 at $91.01
Change since picked:    + 0.02
Earnings Date         01/29/04 (confirmed)
Average Daily Volume:      841 thousand
Chart =


Avid Technology - AVID - close: 42.93 chg: +1.98 stop: 42.01

Wow!  Something is moving AVID's shares and we don't know what it
is.  Unless investors have suddenly caught the Oscar bug and
thank that AVID might get a boost in business from its technology
being used in several nominated films.  The stock actually played
out pretty close to our plan.  Shares hit our exit range of
38.00-38.50 earlier this week but we were a little greedy and
were hoping for $38.00.  We're exiting now that AVID has hit our
stop at $42.

Picked on February 04 at $42.87
Change since picked:     + 0.06
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       612 thousand
Chart =


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Amerada Hess Corp. - AHC - cls: 62.32 chng: -0.01 stop:

With the price of crude oil continuing to make new highs, it is
no great surprise that our AHC play continues to perform, albeit
in a slow and methodical fashion.  The stock finally broke out
over $62 yesterday, and held onto those gains today.  Of course,
it didn't hurt that the Oil Services index (OSX.X) broke out to a
new yearly high today and that bodes well for further upside in
AHC.  The stock has built a minor base near $61 over the past
week and that support is reinforced by the 10-dma ($61.20),
making it a logical place to consider new entries on a pullback.
With price pushing through the $62 resistance level, momentum
traders can look for new entries above $62.50.  Note that we're
getting more aggressive with the stop this evening, raising it to
$59.50, which is the site of the steadily rising 20-dma.

Picked on February 10th at   $59.53
Change since picked:          +2.79
Earnings Date               1/28/04 (confirmed)
Average Daily Volume =        945 K
Chart =


D.R.Horton - DHI - close: 30.95 chg: +0.49 stop: 27.99

We've been suggesting that traders watch for a dip to $29.00-
29.50 for another entry point the last few updates.  Did you use
it?  Shares of DHI dipped to $29.28 on Wednesday when the
existing home sales figures came in lower than expected.  Of
course those are existing home sales and don't really affect DHI.
The stock bounced strongly back above $30.00 by the closing bell
and looked prime for another move higher.  This morning's new
home sales report did the trick.  Economists were looking for a
dip to 1.06 million units and sales came in at 1.11 million.  The
entire sector rallied on the news.  DHI still looks attractive
here at current levels.

Picked on February 08 at $30.00
Change since picked:     + 0.95
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       2.4 million
Chart =


Phelps Dodge - PD - close: 85.19 chg: +0.95 stop: 79.99*new*

The rally in copper continues.  The commodity charged higher
yesterday to a new multi-year closing high and shares of PD
followed suit.  PD is up four days in a row after testing support
at $80.00 on Friday.  The only hurdle between here and the $90.00
level is the early February high of 86.50.  That and a little tax
problem.  A couple of hours after the close this evening PD
announced that it would be lowering its Q4 earnings numbers due
to an extra $9.3 million in taxes.  This equates to about 10
cents per share.  The company is restating its Q4 numbers,
announced in January to reflect the change.  It is unclear how
investors will react to the news if at all.  Traders might want
to look for a bounce from the 10-dma near $83.00 as the next
potential entry point.  We are going to raise our stop loss to

Picked on February 11 at $80.51
Change since picked:     + 4.68
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       1.6 million
Chart =


Qualcomm, Inc. - QCOM - cls: 63.70 chng: +1.62 stop: 60.50*new*

Proving that Monday's stellar breakout wasn't a fluke, QCOM
finished its consolidation of that breakaway gap without ever
actually filling it and over the past two sessions, the stock is
charging higher once again.  Today's session was particularly
encouraging, as the stock actually managed to close above
Monday's intraday high.  With potential resistance at $62 now
cleared, QCOM is free to set its sights on next resistance in the
$67-68 area, our targeted exit point for the play.  As noted on
Tuesday, the best shot at an entry following Monday's breakout
was on a pullback near the $60 level.  We never quite got there
and now it looks like the rally is in the hands of the momentum
bulls.  Breakout entries above $64 should be good to run to our
final target.  Dip buyers might get lucky and see a dip back into
the $61-62 area before QCOPM charges ahead, and that's probably
as good an entry as we're likely to see.  Raise stops to $60.50,
just under Tuesday's intraday low.

Picked on February 17th at   $59.55
Change since picked:          +4.15
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     8.72 mln
Chart =


RJ Reynolds Tobacco - RJR - cls: 61.28 chg: -0.23 stop: 57.50

RJR is making progress, albeit slowly.  With the renewed bounce
in tech stocks investors are paying less attention to defensive
plays like RJR.  However, as long as the stock holds up above
what should be new support at $60 we should be okay.  RJR had
some mixed news late this evening when a California appeals court
upheld a lower court's decision that RJR had violated a 1998
nationwide tobacco settlement targeting children.  While the
decision itself sounds like bad news for the company the appeals
court did reverse a $20 million fine against RJR and told the
lower court to re-examine how they determined that figure.  The
iffy part here is that the appeals court didn't say the fine was
too high just that it needed to be recalculated so it could go
either way (-Reuters). This could be a temporary stumbling block
for RJR shares.  Traders may want to take a look at larger rival
Phillip Morris (a.k.a. Altria Group) symbol MO.  Shares of MO
have also broken out of a recent consolidation and are setting
new yearly highs, which look very bullish.  Just be careful for
resistance near $57.50.

Picked on February 20 at $60.51
Change since picked:     + 0.72
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       699 thousand
Chart =


Renaissancere Ltd - RNR - close: 52.05 chg: +0.94 stop: 49.50

After four days of tight consolidation near the $51.00 level
shares of RNR finally renewed their push higher.  RNR added 1.83%
and closed over the $52 mark for the first time since Feb. 17th.
Volume was just over average and its short-term technicals (RSI
and stochastics) look bullish.  The stock looks ready for
additional gains but conservative traders may want to wait for a
move over the current highs in the $52.20-52.40 range.

Picked on February 15 at $50.83
Change since picked:     + 1.22
Earnings Date          02/03/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =


Schlumberger Ltd - SLB - close: 64.76 change: +0.30 stop: 60.40

The Oil Patch has become a new favorite playground for bullish
investors, as supplies remain tight and demand remains strong,
driving the price of black gold to fresh highs, seemingly on a
daily basis.  SLB is not a fast-moving stock, but it does seem to
be trending well.  We would have liked to see more immediate
follow-through to Tuesday's breakout, but SLB did manage to
slightly extend that breakout over the past two sessions.  While
we could see the stock continue steadily upwards, a near-term
pullback to confirm new support near $62 would be welcome for
traders looking for a solid entry.  The only other choice is to
enter on future breakouts above $65.  Recall that our initial
target is $68, which we expect will just be a waypoint on the way
to our $73-74 target.  Maintain stops at $60.40.

Picked on February 24th at   $64.47
Change since picked:          +0.29
Earnings Date               1/23/04 (confirmed)
Average Daily Volume =     3.55 mln
Chart =


UnitedHealth Group - UNH - close: 61.98 change: +0.10 stop: 58.00

Continuing to ride the lower edge of its rising channel, UNH is
still sneaking up on a breakout over the $62 level.  So the stock
really haven't made much upward progress since we initiated
coverage on Tuesday.  But remember our suggestion to target new
entries on a pullback to the bottom of the channel just above
$60?  UNH delivered that entry setup this morning, when the stock
briefly dropped back to the $60.50 level before rebounding to
close near its high of the day.  Successive dips to the bottom of
the channel still look attractive, so long as the stock continues
to find support at the bottom of that channel, coinciding with
the 20-dma ($60.42).  Of course, momentum traders got their
opportunity to enter on both of the last two days with the
intraday forays over $62.  A break above today's high ($62.29)
can still be used for momentum entries, although our preference
is to enter on the intraday dips.  Maintain stops at $58.

Picked on February 24th at   $61.92
Change since picked:          +0.06
Earnings Date               1/22/04 (confirmed)
Average Daily Volume =     2.52 mln
Chart =


Anthem, Inc. - ATH - close: 85.37 change: +1.00 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:
It is with more than a twinge of regret that we've watched ATH
rebound from its lows last week.  Recall we had played the stock
bullish looking for a breakout over $85 resistance to continue
significantly higher.  With five consecutive days of losses last
Friday, we finally pulled the plug, just before the stock
bottomed and just above our $81 stop.  Looking at the price
action this week, we can safely say that holding that play would
have been a winner, with today's solid breakout over that $85
resistance.  In case you didn't notice, that's a fresh all-time
high and price action is looking strong.  So we're going to take
another shot at jumping into this bullish trend now that we have
a confirmed breakout.  ATH is still on a PnF Buy signal and the
$107 bullish price target is still intact.  We'll set our sights
a bit lower and will look for an initial move to $90, where we
can reassess whether we should shoot even higher.

With the breakout taking place today, there's no need to utilize
a trigger on the play and with today's close so close to $85,
there's certainly nothing wrong with an entry at current levels.
Traders looking for proof of further strength before playing will
want to enter on a break above $85.80.  Those looking for a
better entry on a pullback will want to target a pullback and
rebound from the $84 area, confirming that former resistance
level as new-found support.  While we're initially targeting the
$90 level, our initial stop at $81 (just under last Friday's
intraday low) may seem a bit on the loose side.  The rationale
for that choice is that it is clearly a technically significant
level, and we know from the PnF chart that the potential for more
upside does exist.

Suggested Options:
Shorter Term: The March $85 Call will offer short-term traders
the best return on an immediate move, as it is currently at the

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

BUY CALL MAR-85 ATH-CQ OI=6096 at $2.10 SL=1.00
BUY CALL MAR-90 ATH-CR OI=1510 at $0.45 SL=0.20
BUY CALL APR-85*ATH-DQ OI= 129 at $3.30 SL=1.75
BUY CALL APR-90 ATH-DR OI=   6 at $1.25 SL=0.60

Annotated Chart of ATH:

Picked on February 26th at   $85.37
Change since picked:          +0.00
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.43 mln
Chart =


Ryland Group - RYL - close: 83.96 chg: +3.96 stop: 79.00

Company Description:
With headquarters in Southern California, Ryland is one of the
nation's largest homebuilders and a leading mortgage-finance
company. The Company currently operates in 27 markets across the
country and has built more than 215,000 homes and financed over
185,000 mortgages since its founding in 1967.
(source: company press release)

Why We Like It:
The homebuilding sector has been revived again with the better
than expected new home sales numbers this morning.  Economists
were looking for a dip to 1.06 million units and sales actually
came in a 1.11 million, a smaller than expected pull back.
Combine the strong home sales figures with Greenspan's comments
yesterday that the economy looks good and has moved into a
"vigorous expansion" and together investors have a favorable
outlook for homebuilders.  We like several stocks in the group.
Ryland, Centex (CTX), Beazer (BZH) and more all look like strong
bullish candidates.  We're choosing RYL for its bullish close
over the 50-dma and filling the gap from early January.
Furthermore RYL's P&F chart has produced a strong bullish
breakout and points to a $97 price target.

We're going to target a move to the old highs between $92-94 but
honestly we'd be happy with a rally to $90.00.  The breakout over
$83 looks like a decent entry point but if RYL offers a dip back
to $83 we'd probably take it.  We'll start the play with a stop
loss at $79.00.

Suggested Options:
Short-term traders can choose from the March or April strikes.
We like the April 85's but the April 80's may work on a dip.

BUY CALL MAR 80 RYL-CP OI= 1454 at $5.70 SL=3.25
BUY CALL MAR 85 RYL-CQ OI= 2602 at $2.65 SL=1.30
BUY CALL APR 80 RYL-DP OI=  710 at $7.10 SL=4.25
BUY CALL APR 85*RYL-DQ OI=  309 at $4.20 SL=2.10
BUY CALL APR 90 RYL-DR OI=  931 at $2.35 SL=1.15

Annotated Chart:

Picked on February 24 at $83.96
Change since picked:     + 0.00
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       746 thousand
Chart =


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Chiron Corp - CHIR - close: 49.31 chg: -0.09 stop: 51.50

Our put play in CHIR is off to a slow start.  The consolidation
under the $50 mark continues with buyers still defending the
biotech at $48.85.  The good news is that there was no reaction
in CHIR when news hit that Genentech (NYSE:DNA) had won approval
by the FDA for the Avastin colon-cancer drug.  Sometimes a new
drug approval announcement can lift the whole sector.  This may
not be the case for Avastin.  We're still bearish on CHIR but
more conservative traders may want to use a trigger under $48.85.
Keep your ears open for any news when CHIR presents at the Lehman
Brothers Global Healthcare conference on March 3rd.

Picked on February 24 at $49.11
Change since picked:     + 0.20
Earnings Date          01/28/04 (confirmed)
Average Daily Volume:       1.7 million
Chart =


Cognizant Tech. - CTSH - cls: 47.99 chng: +0.06 stop: 50.50

The good news is that CTSH does appear to be weakening, with the
rebounds from support carrying less and less momentum.  The bad
news is that support near $46 has been tougher to crack than we
had first anticipated.  The stock fell to that support level on
Tuesday and since then has been slowly creeping higher, re-
establishing the 100-dma ($47.14) as support.  Overhead, the 50-
dma ($49.82) combined with horizontal resistance at $50 looks
like a firm barrier, so our $50.50 stop should be out of the way
of the current near-term rebound.  With support being so firm
near $46, it appears the best strategy for new entries is to use
failed rebound attempts below $49.  Note that the 10-dma ($48.79)
provided resistance on the last failed bounce, and if there's
more downside in store, that average should continue to provide

Picked on February 19th at    $47.49
Change since picked:           -0.50
Earnings Date                2/10/04 (confirmed)
Average Daily Volume =      1.30 mln
Chart =


Ingersoll-Rand - IR - close: 65.95 chg: -0.05 stop: 68.00

Our IR put play is also off to a tough start.  Shares bounced
strongly on Wednesday putting IR back above the $65 level and its
rising trendline of support.  Thoughts that this was a "bear
trap" began running through our head.  However, there really
wasn't much of a follow through on Wednesday's move today so it
may turn out to be just an oversold bounce, powered by the same
in the markets.  IR still has resistance overhead at its 50-dma
and the $68.00 level but we'd be cautious on initiating new
positions and probably wait for a move back under the $64.00

Picked on February 24 at $64.72
Change since picked:     + 1.23
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       1.0 million
Chart =


3M Company - MMM - close: 78.18 change: -0.39 stop: 81.50*new*

It took long enough, but MMM is finally starting to show the
weakness that we suspected was lurking under the surface.  After
several feeble rebounds from the 100-dma (now at $79.76), the
stock finally broke down with some conviction yesterday and added
to its losses today, ending very near its low of the day.  Adding
to the bearish picture is the fact that volume is starting to
rise on this latest decline, hinting that the breakdown under $77
that we've been waiting for may be drawing near.  Recall that a
trade at $77 will generate a fresh PnF Sell signal and give us a
tentative bearish price objective of $72.  Failed rebound
attempts below $80 still look like the best bet for new entries,
with momentum entries becoming viable under $77.50, which is just
below the early February lows.  Lower stops to $81.50 tonight,
which is just over the high from February 11th.

Picked on February 15th at    $79.68
Change since picked:           -1.50
Earnings Date                1/20/04 (confirmed)
Average Daily Volume =      2.73 mln
Chart =


Winnebago - WGO - close: 65.32 chg: +0.43 stop: 69.00*new*

WGO appears to be digesting their recent losses with a sideways
consolidation between $64.00 and $66.00.  Technicals are sending
us mixed signals with short-term oscillators suggesting a bullish
move.  Meanwhile its intraday chart suggests traders are selling
the bounces.  The fact that WGO has not bounced more strongly
with the broader indices the last two days may be the biggest
clue.  Alternative entries are a failed rally under $68 or a
breakdown under $64.00.  The challenge with the lower entry is
we're expecting support in our target range of $60-62.  We're
going to lower our stop to $69.00.

Picked on February 22 at $68.13
Change since picked:     - 2.81
Earnings Date          12/17/03 (confirmed)
Average Daily Volume:       276 thousand
Chart =




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The Option Investor Newsletter                 Thursday 02-26-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Homes, Drugs and Biotech
Traders Corner: Real Life Options That Make Sense


Homes, Drugs and Biotech

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.

Centex Corp - CTX - close: 104.15 change: +3.76

WHAT TO WATCH:  The homebuilders were big out performers today
after the new home sales numbers fell less than expected.  Shares
of CTX added 3.74% to breakout above its simple 50-dma and its
earlier February high near $104.  We think CTX may be a play back
toward the $110-112 level and momentum traders may flock to it
with its 2-for-1 split coming up on March 15th.



Pharmaceutical Resources - PRX - close: 60.91 chg: +0.51

WHAT TO WATCH:  PRX announced earnings this morning that beat
estimates by a penny.  Revenues soared almost 125% over last year
on strong generic Paxil sales.  Shares of PRX have been trying to
build a base along the $60 level and its 200-dma.  It's a little
odd that the stock didn't react more strongly to this morning's
earnings news but the intraday trend suggests a potential bullish
breakout building.  We would look for a mover over its 50-dma
and/or the $62.00 level.



Meritage Corp - MTH - close: 73.30 change: +2.21

WHAT TO WATCH:  Yet another homebuilder hitting new highs today.
MTH didn't suffer the same January-February pull back many of its
peers did and the stock looks attractive based on its relative
strength.  We also like the bullish move from new support near
$70.00.  Currently its P&F chart points to an $86 price target.



Invitrogen Corp - IVGN - close: 75.85 change: +1.30

WHAT TO WATCH:  We mentioned IVGN in the MarketMonitor today.
The pull back to technical support at its 50-dma was bought
again.  The latest bounce looks like a good entry point for a run
back toward its highs in the $80-82 range.  Given the positive
news by DNA this afternoon investors may develop a strong taste
for biotechs tomorrow.


RADAR SCREEN - more stocks to watch

RE $86.45 +1.21 - A number of insurance stocks turned in strong
moves today and we like the bounce from $84 in RE.  The stock
looks ready to run back toward resistance near $90.00.

MHK $82.50 +2.04 - This could be more fallout from the new home
sales numbers.  All those homes tend to need carpet and that means
more business for MHK.  The bounce from $80 looks tempting.


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Real Life Options That Make Sense
By Mike Parnos, Investing With Attitude

The concepts and theories we discuss at the CPTI make good sense.
They especially make sense when you apply them to real life –
above and beyond the trading markets.

I found a good example of options at work in everyday life
recently reported in the Wall Street Journal.  In Syracuse, New
York they’ve come up with a way of stabilizing home values in
less-than-attractive urban markets.  A non-profit organization has
developed a home-equity protection program.  The pilot program
enables homeowners to hedge against a decline in property values.

Hedging?  Does that sound familiar?  That’s what we do when we buy
a protective put on stocks and/or other investments.  Now, they’re
coming out with put-buying on real estate.  Great idea!  For the
most part

The Syracuse program is a way to help homeowners protect
themselves against market fluctuations that are beyond their
control – which are most of them.  The concept seems to be working
and there is talk of expanding it to other Eastern cities.

A participant can buy protection of as much as 150% of a home’s
assessed value.  The cost?  A one time fee of 1.5% of the value
protected (which can be financed).  Protecting 150% is the same as
us buying an in-the-money put.  An at-the-money put, in this
scenario, would be buying protection at only the assessed value.
If the house appreciates in value, the homeowner has locked in
those profits.  If it decreases in value, the homeowner is

To keep speculators out of the equation, the program requires
owners to have occupied the home for at least three years.  If
they stay for 30 years, they will receive a payout as though they
exercised the put – and they’ll still own the home.  It’s quite an
incentive to stay PUT.

Options That Expire After You Do
All good things must come to an end – or must they?  According to
a recent article in Barron’s, an electronic trading platform
called NexTrade is trying to generate interest in a new class of
options that never expire.  They’re calling them XPOs.

Think about it.  All the speculators out there who buy options
would be able to add “till death do us part” to their relationship
with their option.  It’s like a lifetime lottery ticket.  Having
been an option buyer (once upon a time), there were instances that
I guess right on the direction, but the damn option expired a week
before.  I learned some expensive lessons and learned not to try
and guess a direction and a timeframe.  That’s just too much
guessing to bet on – no matter what the chart and its spaghetti
may say.

Option sellers (like us), who profit from the erosion of time
premium, would be less than excited about the prospect.  On the
other hand, those who purchase protective puts to hedge their
portfolios would find the idea appealing.

It all depends on the pricing.  I suspect the perpetual options
would be pretty pricey.  How do you charge for forever?
Speculators like the expiring options because they’re
substantially cheaper than XPOs would be – resulting in greater

I’m not worried about these XPOs infringing on our premium-selling
methods of generating money.  It could be years away from approval
– even if they can come up with a reasonable pricing model and can
entice option traders to change.  You can’t teach an old dog new
tricks.  But, eventually, even old dogs expire.  These options, if
adopted, may survive us all.  If you’re interesting in reading
more on the subject, the NexTrade website is www.nextrade.com.

Passing Thoughts
1. An invisible man marries an invisible woman. The kids were
nothing to look at, either.
2. I went to buy some camouflage trousers the other day but I
couldn't find any.
3. Two satellite dishes meet on a roof, fall in love and get
married. The ceremony wasn't much, but the reception was
4. A dyslexic man walks into a bra.


Position #1 – OEX (S&P 100 Index) Iron Condor – 565.49
We sold 12 OEX March 595 calls and bought 12 OEX March 605 calls
(Bear Call Spread).  Then we sold 12 OEX March 540 puts and bought
12 OEX March 530 puts (Bull Put Spread).  The total net credit was
$1.20 ($1,440).  Maximum profit range: 540 – 595.  Maintenance:

Position #2 – RUT (Small Cap Index) Iron Condor – 583.86
We sold 8 RUT March 610 calls and bought 8 RUT March 620 calls
(Bear Call Spread).  Then we sold 8 RUT March 550 puts and buy 8
RUT March 540 puts (Bull Put Spread).  The total net credit was
$2.75 ($2,200).  Maximum profit range: 550 - 610.  Maintenance:

Position $3 – MNX (Mini-NDX Index) Iron Condor - $147.71
We sold 20 MNX March $157.50 calls and bought 20 MNX March $160
calls (Bear Call Spread).  Then we sold 20 MNX March $142.50 puts
and bought 20 MNX March $140.00 puts (Bull Put Spread).  The total
net credit was $.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 - $146.10
We sold 10 BBH March $145 calls and sell 10 BBH March $145 puts
for a credit of about $6.95.  Then we bought 10 BBH March $160
calls and buy 10 BBH March $130 puts for a debit of about $.70.
The total net credit is $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.

QQQ ITM Strangle – Ongoing Long Term -- $36.68
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 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 – 565.49
In my 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.

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

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


By Leigh Stevens

A recent Trader's Corner article by Jane Fox -
described 3 types of the Indicators known as envelope "bands":
Moving average envelopes, Bollinger Bands, and Kelter channels.
Bolinger Bands and Kelter channels build volatility into their
equations and can be used as so-called "breakout" indicators and
are not the subject of this article. "Moving average envelopes" are
my focus here.

Moving Average envelopes have 3 component lines.  One line is
a moving average and is shown on the price chart. Two: a line
that "floats" above the moving average and most of the price
action. Three: a line that is set at some percentage below the
moving average.

In the moving average envelopes Indicator you can at most, set
the following different inputs or vary the:
1. Type of moving average; e.g., simple, exponential, etc.
2. Length of the moving average; e.g., the number of trading
   periods - averaging 10, 20 or 30 days; or, hours, etc.
3. Percentage figure above the moving average in question.
4. Percent figure below the moving average.

In some application programs, you will not be allowed to make the
upper envelope percentage any greater or lesser than the lower
envelope line - in other words, the lower moving average envelope
line AND the upper moving average envelope can only be the SAME
percentage - there is only one "envelope" setting possible.

This is a bit of an unfortunate limitation for trading the
indexes. In the Indexes, in an uptrend, the moving average
percentage will increase on the upper side - that is, the
percentage at and under which MOST trading occurs is a bit higher
than the lower envelope line; e.g., 5% versus 3%, or 3 versus 2%.

And, for the type of moving average, I use a simple moving
average (SMA), so it a matter of adding the closing price of some
number of trading periods (e.g., days, hours, etc.) and dividing
by this same number, for example the sum of the past 10 closes
divided by 10.

My favorite moving average length to use for Stock Indexes is 21,
which I mostly use on Daily charts only. The regular blue chip
market as represented by the S&P 500 Index, in an “average”
market cycle or trend duration, will tend to see prices fluctuate
in a range that is typically 2-3 percent above or below its 21-
day average. As we are interested in also seeing the high and low
extremes relative to the envelope lines, bar (or candlestick)
charts are used.

In a volatile market, the S&P envelope line can expand to 4%
or more, but it won't typically be more than this.  With the
Nasdaq, this percentage might be 5-6%.  The percentage line we
are looking for is the one that will then contain within it most
of the daily highs and lows that occur.

I am demonstrating the use of moving average envelopes for
the Indexes only.  Due to the bouts of volatility associated with
earnings, business developments, etc., individual stocks tend to
work less consistently than for the indexes, which "smooth" out
the individual stock "hiccups" and reversals.

A bar chart with a moving average envelope:

In an uptrend I usually end up setting the UPPER band at a
greater percentage ABOVE the center moving average.  In
a declining trend that goes on for a long period (a bear market),
the declines will typically bottom at a greater distance BELOW
the center moving average.

There is not typically a huge gap between the upper envelope
percent and the lower envelope line percentage - as of
this writing, on the S&P 500 (SPX) I am using a 3% envelope line
for the upper envelope and 2.5% for the lower envelope line.

In an uptrend, a high probability trade is to buy dips (e.g., buy
OEX calls) when prices fall to the lower envelope line.  The
reverse is true in a sustained downtrend - buy puts on moves up
to the upper envelope, at least one that has been "containing"
the rallies that have occurred in the past 9-12 months.

After about 6 weeks of an uptrend or downtrend that has been
closely hugging the upper/lower envelope lines, the odds
increasingly favor a correction and can be favorable to a bet on
at least a sideways trend ahead which suggesting selling option
premium; e.g., shorting calls or puts.

On the Nasdaq 100 (NDX) Index, often in recent years the most
volatile of the major indices, my current settings for the two
Daily chart envelope lines is 4% for the upper band and 3% for
the lower envelope line.  Even here, it's not a huge difference
between where the index tops out or bottoms, in percentage terms.
However, there are other differences.

In a prolonged downtrend/bear market, there will tend to be MORE
instances of the index topping out in the area of the "centered"
moving average and there will be more "touches" to the LOWER
line. The reverse is true in a dominant uptrend or bull market,
where there will tend to be a number of lows that are "contained"
or held at the centered moving average and more "touches" to and
along the UPPER envelope line.

The following characteristics list is one I have used to sum up
and categorize the tendencies of market action relative to moving
averages and their upper and lower envelopes:

1. Determination of what moving average to use somewhat arbitrary
but is found by what “works” in the most number of markets.  The
biggest variation is with the percentages above and below this
line.  I suggest using a 21-day moving average length for the
Stock Indices. You can experiment yourself too with different

2. A common starting point for the Index envelope size is 3% with
the Dow and S&P or 4-5% in the case of the Nasdaq. The envelope
size varies from trend to trend and market to market.  For an
envelope size that “works” – the percent figure that contains
within it 90-95% of the price moves above and below the moving
average -- start with 3% and expand or contract the envelope size
as is appropriate for the dominant trend.

3. If the last high was 4% above the moving average, the next
high will often reflect the same extreme.  Conversely, if the
last significant downswing low was 3% below the moving average,
keep this figure as the lower envelope setting until market
action otherwise dictates.

4. If prices cross above the moving average, assume that this
line will act as support on pullbacks and the next rally will
have the potential to advance to the upper envelope line. If in
an uptrend, the envelope line can act as a rising line of
resistance for multiple rallies – the rally tops will “hug” and
move up "along" the upper envelope line. The key thing is that
rate of increase will SLOW - the index will not always reverse on
move to or above the line.

5. If prices cross below the center moving average, assume that
this line will act as resistance on any rebounds and that
downside potential now becomes for a move to the lower envelope
line.  If the trend is down, the envelope line may act as a
falling support line and there may be multiple downswings that
touch or “hug” and move down "along" the lower envelope line.

6. In an uptrend, the optimum Index Call purchases are the
declines to the lower envelope line – this area will both define
where the stock or other item is both “oversold” and the specific
price area that offers a opportune buying opportunity. If in a
downtrend, sell advances to the upper envelope line – this area
will help define where the market is both “overbought” and the
specific price area most opportune as a selling point.

In an uptrend, when the index goes through and STAYS ABOVE the
21-day average it usually does it quickly and maintains a pattern
of higher highs such as is seen with QQQ until recently. When a
rally "fails" very quickly and fairly soon again has a pattern of
falling relative highs and lows and, within a few trading
periods, again falls under the center moving average - this
pattern suggests adopting a bearish trading bias.

7. Even if there is an extension of a price swing to above or
below the envelope lines, the probability for a significant
further move in that direction is limited, especially if the
price swing is a counter-trend move.  At a minimum, there should
be a reaction (countertrend move) once prices are above or below
the envelope line in question.

There is not much more to say about how to use envelopes except
to say that the use of this technical indicator gives another
kind of an idea about where a market might be at an extreme.
While extremes don't happen all that often, when they do, it
often marks a very good trading opportunity.  And, we don't need
more than a few of these to make for a profitable year trading


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