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Daily Newsletter, Monday, 03/01/2004

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The Option Investor Newsletter                  Monday  03-01-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: March Opens Bullish
Futures Wrap: Russell Breakout
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     03-01-2004            High     Low     Volume Advance/Decline
DJIA    10678.14 + 94.22 10695.55 10582.22 1.76 bln   2182/ 665
NASDAQ   2057.80 + 27.98  2057.80  2032.64 1.68 bln   2091/1025
S&P 100   569.43 +  4.89   570.18   564.54   Totals   4273/1690
S&P 500  1155.97 + 11.03  1157.48  1144.94
RUS 2000  594.77 +  9.21   594.77   585.56
DJ TRANS 2916.61 + 14.42  2916.61  2886.89
VIX        14.44 -  0.11    15.05    14.40
VXO        14.18 -  0.58    14.94    14.15
VXN        22.54 -  0.30    24.02    22.54
Total Volume 3,862M
Total UpVol  3,086M
Total DnVol    709M
52wk Highs     839
52wk Lows       15
TRIN          0.69
PUT/CALL      0.74
*******************************************************************

March Opens Bullish
by James Brown

Investors came back from the weekend in a buying mood and sent
the Dow to one of its best gains in 7 weeks and the NASDAQ above
short-term resistance at 2050.  Fueling the market-wide rally was
the ISM index that reported growth in the manufacturing sector
for the 10th month in a row.  The markets were also encouraged by
a stronger employment component in the ISM as they look forward
toward this Friday's employment report.  Even the semiconductor
index overcame early losses due to an Intel downgrade and closed
higher with a 2% gain.

According to the Stock Traders Almanac the first trading day in
March has been up 6 out of the last 8 years.  We can now scratch
another point in the up column.  The Dow Jones Industrials added
94 points to close at 10,678.  The NASDAQ surged nearly 28 points
to 2057 and the S&P 500 added 11 points to close at 1155.  The
rally was very wide spread with every major index closing higher
save for the BTK biotech index, which lost 0.07%.  Buying
interest was very strong in homebuilders, airlines, oil and gas,
semiconductors and retail stocks.

Global markets were generally positive as well.  The Japanese
NIKKEI added another 229 points on top of Friday's 2.1% gain to
close at 11,271 - a new twenty-month high for the index.  The
Chinese Hang Seng added 11 points to close at 13,918.  European
stocks were higher as the dollar added 0.4% against the euro.
The British FTSE jumped almost 45 points to 4,537 and the German
DAX added 36 to 4054.  The gain in the dollar puts the brakes on
gold today.  Gold futures had rallied above $400 an ounce earlier
in the session but couldn't hold it and closed at $399.60 an
ounce (+2.80 for the day).

Gold wasn't the only commodity making a move today.  Platinum
rallied to $902 fell back to $895 and then rallied again in the
afternoon to close up $18.70 to $906.80 an ounce - a twenty-four
year high.  Silver broke above the $7.00 level intraday and
closed up 3.4% or 23 cents to $6.945 an ounce.  This was the best
level since February 1998 for the metal.  Copper surged another
3.9% or 5.25 cents a pound to $1.3985.  This is an eight-year
high for the metal and helped drive shares of Phelps Dodge (PD) a
copper miner to new all-time highs at $89.81 (+4.11% today).

Not to be out done by the metals crude oil rose 70 cents to
$36.86 a barrel, the highest since its pre-Iraq war spike in
March 2003.  Normally when crude prices trade above $30 a barrel
it's tough for OPEC to keep its members from pumping more than
their agreed to quotas but oil has risen more than $4 a barrel
since their last meeting in February where they agreed to reduce
their quotas another 4% starting in April.  I've mentioned it
before but it's amazing that the economy has been able to absorb
this sort of increase.  The rising cost of oil affects numerous
sectors from manufacturing to transports.  I'm honestly surprised
that the airlines whose profits are directly affected by fuel
costs have been able to trade sideways with oil skyrocketing.  It
won't be long and consumers are going to feel the sting of higher
oil prices at the pump and that will weigh on retail sales and
consumer confidence.

Market internals were very bullish today and bode well for the
strength in this rally.  Advancing stocks outnumbered losers 3 to
1 on the NYSE and 2 to 1 on the NASDAQ.  New highs surged to 645
versus 11 new lows between the two exchanges.  One of the most
bullish internals is how up volume sprinted past down volume by
more than 4-to-1 on both exchanges.

The daily chart for the Dow Jones Industrials looks pretty
encouraging with its short-term oscillators (RSI and stochastics)
curling higher from oversold.  We could see the index challenge
resistance at 10,750 soon.  The rally in the NASDAQ was enough to
push the Composite back above its simple 50-dma and its
technicals suggest we could see a run toward resistance in the
2090 range.

Chart of the DJIA:



Chart of the NASDAQ Composite:



The single biggest factor in today's rally was probably the ISM
index.  Economists had been expecting a dip to 62.1% from
January's 20-year high at 63.6%.  Remember that readings over 50
indicate growth and expansion.  The headline number was worse
than expected at 61.4% but investors cheered anyway.  February's
ISM marked the 10th month in a row for an expanding manufacturing
sector and the fourth month in a row for a reading over 60.  The
New Orders component slipped to 66.4 from 71.1 and prices paid
rose to 81.5 from 75.5 but the component that drew the most
excitement was the employment index component.  Manufacturing
employment rose to 56.3% in February from 52.9% in January.  This
was the best reading in 16 years for the employment component and
sparked renewed enthusiasm for this Friday's unemployment/jobs
report.  Currently the forecast on Friday is for unemployment to
hold steady at 5.6% while the economy is expected to add 125,000
new jobs last month.

The ISM wasn't the only economic report out today.  The U.S.
Commerce Department also released figures for January
construction spending and personal income and spending numbers.
Construction spending fell 0.3% to an annual rate of $931.2
billion, its first decline in eight months.  The decline was lead
by a 0.8% drop in business construction as residential
construction spending remained strong.  Meanwhile personal
spending rose 0.5% in January, which was inline with estimates.
Personal income rose 0.2%, which was below estimates.

Monday's biggest story stock was Sepracor (SEPR).  Before this
morning's opening bell SEPR announced that it has received a
conditional "approvable" letter from the FDA for its insomnia
treatment called Estorra.  While it is unknown what sort of
conditions the FDA set for SEPR to market its new drug the
company did say that additional patient testing would not be
needed.  SEPR now plans to ramp up its sales forces and marketing
costs to launch Estorra by mid-2004.  Analysts were very bullish
on the news with Deutsche Securities, Lehman Brothers, Morgan
Stanley and Standard & Poor's all upgrading the stock.  One
analyst expects that Estorra could grab 25% of the $2 billion
market currently lead by insomnia drugs Ambien and Sonata,
produced by Sanofi-Synthelabo (SNY) and King Pharmaceuticals
(KG), respectively.  Shares of SEPR gapped higher on the news and
continued to rally ending the session up 56% to $44.30.

Medimmune and AAIPharma were two drugs stocks also making
headlines today.  Unfortunately for shareholders in the two
companies their stocks went south.  Medimmune (MEDI) lost 6.18%
after lowering its earnings estimates due to increased R&D costs.
The company plans to increase R&D to 20% of sales but this will
reduce Q1 earnings to 40-43 cents a share, which is below
estimates of 54 cents per share.  MEDI expects full year 2004
earnings in the 50-60 cents a share range, which is well below
estimates of 94 cents.  Investors were also concerned that Wyeth
(WYE) may back out of its FluMist marketing partnership with MEDI
after a disappointing launch last year.  Meanwhile AAIPharma
(AAII) announced it had hired an independent auditor to
investigate "sales abnormalities" in its recently launched
Brethine and Darvocet drugs.  Brethine is an asthma treatment and
Darvocet is a painkiller.  AAII withdrew their 2004 earnings
guidance given the ongoing investigation and S&P lowered their
credit rating on the stock.  Shares of AAII dropped 36% to close
at $9.77.

The big news for tech stocks this morning was a downgrade for
both Intel (INTC) and its rival Advanced Micro Devices (AMD).  A
J.P. Morgan analyst downgraded Intel from "over weight" to
"neutral" over concerns for notebook PC sales and product delays.
Intel will take center stage on Thursday evening this week with
its mid-quarter update but the JPMorgan analyst does not expect
Intel to raise guidance for the first time in nearly a year.  JPM
also downgraded AMD from "neutral" to "under weight".  Shares of
AMD recouped most of its losses but still closed down 11 cents to
$14.89.  INTC was stronger and added 1.67% or 49 cents to close
at $29.69.  Contributing to strength in the chip sector was news
from the Semiconductor Industry Association (SIA) who reported
that January's global chip sales rose 27% over a year ago period
to $15.6 billion.  This was a 2.4% decline from December levels
but the pull back was expected and SIA stands by their 2004
forecasts for 19.4% sales growth.  Readers may remember that it
was just last week that the Gartner research group raised their
2004 semiconductor sales forecast to +23% growth.

Tomorrow will be interesting.  Bulls will be looking for some
follow through on today's rally.  After six weeks of sideways to
down trading we're probably overdue for the bounce anyway.
Tuesday we'll hear the auto and truck sales numbers but most
investors will be focused on Wednesday's ISM services index and
the Fed's Beige Book report.  Overall traders sound pretty
confident as I keep hearing comments about what a great
environment this is for stocks with low interest rates, rising
earnings and a recovery economy.  Or if you prefer a little
Greenspeak we can call it a "vigorous expansion".


************
FUTURES WRAP
************

Russell Breakout
By Jim Brown


Index	High	Low	Close	 	
ES04H	1157.50	1144.25	1155.50		
YM04H	10691.00	10598.00	10672.00		
NQ04H	1473.00	1491.50	1490.00		
ER04H	594.50	583.80	593.50	(MR04H)	
 					
Pivots	R2	R1	Pivot	S1	S2
ES04H	1165.67	1160.59	1152.42	1147.34	1139.17
YM04H	10746.00	10709.00	10653.00	10616.00	10560.00
NQ04H	1466.33	1478.16	1484.83	1496.66	1503.33
ER04H	601.30	597.40	590.60	586.70	579.90

It was a stealth rally day if you ignored the very strong
internals. The markets looked like they were going to fail
several times and traded sideways more than they traded up.
In the end the ES closed right below its high for the day
and for the contract. A very bullish day.

The Dow never quite made it to 10700 but came very close
once the Nasdaq decided to join the rally party. The leader
for the day was again the Russell with a +1.57% gain and it
far outstripped the rest of the markets. This is very bullish
and represents the fifth consecutive day of strong gains that
have averaged nearly +6 points per day. The Russell is the
little index that thought it could but it is very close to
the February highs just over 595 and the January highs just
over 600. The all time closing high for the Russell is 603
in March of 2000. I tell you all of this because the next
10 points for the Russell is VERY strong resistance and it
will impact the rest of the market.

ES04H S&P Futures

The ES futures closed right below the contract highs and
very strong resistance at 1157-1158. There is a huge bullish
wedge building since late January and a strong break over
1158 would be very bullish. There is a strong uptrend channel
over the last five days and that channel is about to intersect
the horizontal resistance. This suggests that a failure at
1158 on Tuesday could see a retest of the uptrend support
at 1147.

ES04H Chart - Daily



ES04H Chart - 15 min



ES04H Chart - 233 Tick




YM04H Dow Futures

The Dow futures are showing the same top at 10725 as the ES
futures at 1157 but the Dow is not showing as much strength.
The uptrend is still in place but a failure here could produce
a textbook head and shoulders with 10725 as the head in the
middle of February. I do not think our fate is in the hands
of the Dow but in the hands of the Russell and the Nasdaq.
There are only a handful of stocks in the Dow that are holding
it back and the broader indexes will control our future.

YM04H Chart - Daily


YM04H Chart - 15 min


YM04H Chart - 233 tick




NQ04H NDX Futures

The Nasdaq futures are struggling to break several levels of
resistance. The Nasdaq met horizontal resistance at 1490 today
and still has the 50dma currently at 1494 in its near future.
There is downtrending resistance just above 1500 and horizontal
resistance at 1530. While it appears all the factors are coming
together to work against the NQ the internals have been strong
and the Russell is helping provide lift. The Nasdaq COMPX did
close above its 50dma at 2053 and that was mildly bullish. If
we can get past the 1520 level this week it should guarantee
a quick retest of the highs at 1550. The April earnings runs
should begin soon and it appears the Russell started last week.

NQ04H Chart - Daily



NQ04H Chart - 30 min



NQ04H Chart - 500 Tick



ER04H/MR04H Russell Futures

The Russell has been very strong for the last five days and has
risen from a test of its 50dma to being very close to retesting
the highs. This has been a textbook rebound but the fairy tale
could find some rough spots ahead.

The Russell futures have strong resistance at 595-597 and they
are over extended after their five day run. There has been very
little profit taking on the way up and with the Russell and the
Dow very near critical resistance now would be the time.

I would look to short 597.00 and go long on a dip to 590 which
should be initial support.

MR04H (ER) Chart - Daily


MR04H Chart - 30 min


MR04H (ER) Chart - 233 Tick




Outlook

For Tuesday I am looking for a test of resistance on the Russell
at 597 and a potential failure. We have Greenspan talking at
12:30 and the Russell is very extended. I would look to short
at ER 597, ES 1158, NQ 1495, YM 10700. Should those levels be
exceeded I would look for weakness to enter a short.

While I am bullish on the market overall I simply think the
five day run is getting tired. I doubt the Dow can get over
10750 without several days of trying and odds are good we are
going to backfill first before it is successful.

If we do get the profit taking I would go long at ER 590, YM
10600, NQ 1475, ES 1147.

Obviously I do not expect all the short/long entries to be
reached at the same time so judgment will be required to
determine which instrument is controlling the rest when
those levels begin to be reached.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_030104_1.asp


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The Option Investor Newsletter                   Monday 03-01-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: AHC, ATH, SLB
Dropped Calls: PD
Dropped Puts:
Watch List: Support Holds


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*****************
STOP-LOSS UPDATES
*****************

AHC - call
Adjust from $60.75 up to $62.50

ATH - call
Adjust from $81.00 up to $82.00

SLB - call
Adjust from $60.40 up to $62.75

*************
DROPPED CALLS
*************

Phelps Dodge - PD - close: 89.81 chg: +3.55 stop: 79.99

A big day for commodities sent copper futures to another 8-year
high and shares of PD followed suit with a new high of its own.
The close at $89.81 is above our exit range of $88-89 and while
the stock looks poised for more gains we're going to exit here.
Traders not willing to cash in can raise their stops.  We're
going to look for another dip back toward the $85 level to re-
evaluate another entry point.  Considering our picked price of
$80.51 we're not going to get too greedy.

Picked on February 11 at $80.51
Change since picked:     + 9.30
Earnings Date          01/29/04 (confirmed)
Average Daily Volume:       1.6 million

Chart =



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************
DROPPED PUTS
************

None


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**********
Watch List
**********

Support Holds

Freeport McMoran Copper & Gold - FCX - close: 44.30 change: +1.65

WHAT TO WATCH: With precious metals stocks on the rise again
Monday, FCX solidified Friday's breakout over its short-term
descending trendline and rose to test horizontal resistance near
$45.  This looks like the prelude to a breakout and likely move
above the December highs near $46.75.  A pullback to support near
$42.50 would make for the best entry, but momentum traders should
also do well entering on strength over $45.  Target a rally to the
$50 level

Chart=


---

United Parcel Service Inc. - UPS - close: 69.85 change: -0.78

WHAT TO WATCH: In contrast to the broad market, UPS had a rather
disappointing start to the week, dropping back under the $70
level.  With volume running stronger than average, it looks like
the stock is finally going to break down.  Use a trigger at $69.25
(just under last week's reaction low) and target a decline towards
strong support in the $64-65 area, watching for a possible short-
term bounce from the 200-dma on the way down.

Chart=


---

CDW Corp. - CDWC - close: 74.34 change: +5.07

WHAT TO WATCH: It took longer than we anticipated, but CDWC
finally broke out over the $70 level as we were expecting when we
played it on the Call list a couple weeks ago.  With volume
surging to more than double the ADV on Monday, the stock tacked on
an impressive 7.3% gain.  Clearly, this is a bit much of an upward
move to chase, but a pullback over the next several sessions to
confirm support near $70 would now make for an excellent
continuation entry.  Note that the PnF bullish price target is
$93, so there's definitely room to the upside.

Chart=


---

KB Home - KBH - close: 76.47 change: +4.12

WHAT TO WATCH: The Housing sector has definitely not been a place
for timid investors in recent months and with the bullish action
of the past few sessions, that statement is as true as ever.  KBH
broke out on an impressive high-volume gap and run on Monday and
this puts the stock at new all time highs.  Chasing it higher at
this point is a risky ploy, but a pullback to confirm support in
the $72-73 area just might do the trick.  Look for continued
upside to at least the $80 level as long as bond yields continue
to work their way lower.

Chart=


---

===================
On the RADAR Screen
===================

UOPX $84.12 - The Education stocks are on the run again, and UOPX
led the charge on Monday, gaining more than 4.5% to close right at
resistance at the all-time highs.  Use an entry trigger over
$84.25 and target a rally to the $90 level.

MDC $74.07 - With the Housing stocks looking bullish again on
Monday, MDC finally delivered the breakout that has been brewing
since the stock topped just over $70 back in early November.  With
this breakout coming on expanding volume, expectations of further
upside certainly seem logical.  But in the wake of today's 5%
advance, momentum entries may not be the best choice.  Look for a
pullback to confirm support in the $70-71 area to provide a lower
risk entry.

BCR $97.26 - After last week's consolidation, breakouts are
breaking out all over again.  Not to be left out, BCR blasted
through its $95 resistance level to set a new all-time high and it
looks like there's more upside in store.  A slight pullback to
confirm $95 as newfound support would make a great entry ahead of
upside continuation to $100 and above.


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

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

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subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

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and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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**********

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