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Daily Newsletter, Thursday, 03/04/2004

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The Option Investor Newsletter                 Tuesday 03-04-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Inline Guidance?
Futures Markets: See Note
Index Trader Wrap:
Market Sentiment: One Word: Cautious


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      03-04-2004           High     Low     Volume   Adv/Dcl
DJIA    10588.00 -  5.10 10603.25 10562.74 1.59 bln 1980/1227
NASDAQ   2055.11 + 21.80  2055.12  2031.84 1.80 bln 2091/1055
S&P 100   568.32 +  1.81   568.70   566.16   Totals 4071/2282
S&P 500  1154.87 +  3.84  1154.97  1149.81
W5000   11288.38 + 50.10 11288.44 11226.22
SOX       508.70 +  8.20   508.78   500.55
RUS 2000  598.38 +  7.06   598.39   589.52
DJ TRANS 2884.62 -  3.30  2888.27  2864.78
VIX        14.40 -  0.15    14.50    14.19
VXO (VIX-O)14.71 +  0.01    14.99    14.57
VXN        22.50 -  0.59    23.30    22.38
Total Volume 3,664M
Total UpVol  2,450M
Total DnVol  1,028M
Total Adv  4599
Total Dcl  2593
52wk Highs  591
52wk Lows     9
TRIN       0.96
PUT/CALL   0.71
************************************************************

Inline Guidance?

After a day of mixed markets, sweaty palms and tension so
strong you could smell it, Intel lowered its guidance ever
so slightly. The initial reaction was negative until the
spin doctors hit the airwaves and the damage was muted. The
markets, except for the Dow, had ended the days at the highs
on expectations of good news. Was it good enough to keep
them there?

Dow Chart - Daily


Nasdaq Chart - Daily



Economically it was a strong day that helped build the
tension in front of the Intel news. The retail same store
sales for February came in at +6.7% and that was the
strongest gain since records were first kept in Nov-2000
according to Thompson First Call. The gain was attributed
to tax rebates, weather and strong discounting. This trend
should continue for the next three months as tax refunds
hit mailboxes across the country. Good spring weather would
also help the change of seasonal merchandise. Wal-Mart said
same store sales rose +6.2% and raised its guidance for
March to 4-6% from 3-5%. Its total sales from all stores
rose +14%.

Jobless Claims fell to 345,000 and a drop of -7,000 from
the prior week. The prior week was revised upward to 352K.
39 states reported a decrease in claims for the week. Claims
trending under 350K per week have historically been followed
by job growth in the +150K per month range. That was the
historical trend before three million jobs per year were
outsourced overseas. We do not know what new level will be
required to produce sustained U.S. job growth.

The final Q4 productivity was revised downward to +2.6% and
was slightly less than expectations but still strong. You
might remember the Q3 productivity was a very strong +9.5%.
The final productivity for the year was +4.4%. There was a
strong revision to the hourly compensation to +1.4%. This
was significantly higher than the +0.5% initial number. The
increase in compensation is surprising due to the higher
competition for available jobs and the current reduction
in benefits trend. Despite the bear market or maybe because
of layoffs prompted by it the last two years of productivity
growth were the strongest on record since the government
began keeping records in 1940. Ironic since it also
contained some of the largest job losses in recent history.
But, fewer workers is what raises productivity. Using that
analogy corporations could fire everyone and raise their
productivity to 100%. Be tough finding consumers to buy
your products with everyone unemployed. Obviously I say
this in jest lest anyone take it wrongly.

Factory Orders for January fell -0.5% and slightly more
than the estimates at -0.3% but the trend for increased
capital spending is still up. The orders have been
alternating up/down almost each month for all of 2003
and the minor drop after a +2.1% jump in December was
nothing to worry about. December's numbers were revised
up making the net change for January nearly flat. The
biggest problem with the report was a -2.3% decline in
durable goods but the non-durable continued to climb
+1.6%. Much of the overall decline came from the
transportation component which fell -10.3% but that
component is normally discounted due to big swings. While
the factory orders are showing overall uptrend improvement
the gains are not as wide as analyst's would like. It
suggests the recovery is narrower then previously
expected and it will take a stronger surge going forward
to keep the recovery on track. Analysts fear the narrow
breadth could easily crumble if conditions stagnated even
slightly.

In stock news the mouse house fired half of Michael Eisner
and took away his Chairman duties. He remains CEO of Disney.
They gave the job to a career board sitter Senator Mitchell
who coincidently had nearly as large a no confidence vote
(23%) as Eisner. Not being a DIS stockholder I have no
opinion other than image is considerably important to stock
prices. If 43% of the stockholders basically voted to cut
Eisner then what is the board thinking by replacing him
with somebody else they don't like? Why does Eisner need
this aggravation? Take the money and run and let the
peasants have a new king.

Dell Chairman and CEO Michael Dell must have seen the
writing on the wall and he beat the rabble to the punch
by resigning as CEO and appointing the President of Dell,
Kevin Rollins, as CEO. Unfortunately Dell stockholders
were not impressed and wanted Michael as the CEO and the
stock fell on the news. Personally, if I were Michael I
would give up both jobs and find a beach somewhere. He
has turned a $1000 investment into an $85B company. Time
to retire a hero Michael. Don't wait for the stockholders
to give you a no vote when the next recession appears.
(like they would really do that - grin) Dell has created
more millionaires than almost any other company in history
except maybe Microsoft. Michael Dell is following in the
footsteps of Bill Gates who also stepped aside to let
other run the company and give himself more time to be
the visionary.

The big news after the bell was the Intel mid quarter update.
Intel lowered their revenue estimates from a range of $7.9B
to $8.5B to a range of $8.0B to $8.2B. That is .3 knocked
off the top side and only .1 added to the bottom. To be
fair this is not a big deal but the dueling analysts were
trying to out spin each other after the bell. Various
spinsters were pointing out that Intel usually revises to
the high side of the range and a low side revision suggests
that business was lighter than expected. Duh! Lighter
because Intel has various ways to "account" for revenue
that would allow them to adjust to the center of the range
if they could. The idea here is that the best they could
manage was lighter than expected. The positive analysts
were pointing out that Intel was only a "rounding error"
away from their midpoint and it was confirmation that the
business was still strong. The phrase you will probably
hear the most tomorrow is "sales consistent with the lower
end of normal seasonal patterns" with the emphasis on the
word lower. Traders always want to hear that sales are
coming in at the high end of estimates. Intel initially
fell on the news but recovered somewhat later in the
session. Considering the bullish tilt to the tech stocks
during normal hours and seeing the futures recover in
after hours I am not seeing any major impact to Friday's
market. We still have a lot of darkness before morning and
we did close near the highs. I suspect the Employment
Report will take the spotlight more than the Intel news.

The Intel weakness had been predicted by several analysts.
There is apparently a short term glut of notebooks and
the Banc America analyst today said it should only last
2-3 months. That glut came in a quarter that is not
normally known for tech strength so it is being mostly
ignored. HPQ also warned that things were not as hot
in tech land as most expected when they said they were
only seeing a +1% to +2% gain in IT spending for 2004.
The Nasdaq has been listless and range bound for the
last month as these factors have been digested.

Flextronics also provided an update after the close and
it left its forecast unchanged. They affirmed estimates
of 9-11 cents and analysts are already expecting 11 cents.
Could be a challenge there. FLEX traded down slightly in
after hours.

The next major hurdle is the Employment Report tomorrow
morning. We finally saw some headline grabbing today with
estimates well above the +125,000 consensus estimate. Those
trying to grab the spotlight included Brian Wesbury a guest
on CNBC who predicted +210,000 jobs. Steve Liesman then
jumped out in front of the crowd with a size does matter
+250,000 estimate in one spot and then declined to quote
a number in another. Later an analyst on one of the later
stock TV sound bites went all the way to 310,000. I did
not catch his name. Thus it has begun. After a great deal
of calm leading up to the event the expectations are
finally being driven into a reporting frenzy. Fortunately
this did not happen far enough in advance to build these
expectations into the market. As it stands I think we
are neutral and anything over +75K will be seen with some
relief and anything over +125K could be greeted warmly.
Anything under 75K should be seen progressively negative
the closer to zero it gets.

We have not had any Fedspeak about jobs this week. That
worries me. In the recent past they actually went on the
attack and talked up/down jobs with a full court press
that was sometimes contrary to the actual numbers in
order to juice the markets when the actual numbers were
announced. It was deathly quiet this week. Either the
numbers do not need any makeup to improve the reception
or they are laying low after the Greenspan attack on
social security and the dollar had adverse results on
the markets.

While techs were surging on Thursday the Dow was dormant
for the entire day. It traded in a very narrow 40 point
range and despite several tries was never able to hold
over 10600 for more than a couple minutes. Except for
the Monday bounce the Dow has been locked in a range
from 10550 to 10650 and it is holding just under the
midline at 10600. Trying to paint a technical picture
of the Dow one would only need a piece of paper and a
straight edge. Other than the Monday bounce absolutely
nothing is happening. The one bright point is the ever
rising 50dma currently at 10546. With current strong
support at 10550 the addition of the 50dma support
should make that level tough to break without a major
Jobs failure.

Dow Chart - 45 min



The Nasdaq surprised everyone with a rise ahead of the
Intel news and a gain of +21 points. The index rebounded
from an early morning dip to 2031 and closed at 2053.
There was a battle at 2050 most of the afternoon but
short covering before the close finally broke the
deadlock.  The high on Tuesday before Greenspan tanked
the markets was 2064. The rally this afternoon was a
relief considering the -45 point drop from those highs
to yesterday's lows. The Nasdaq rebounded to close right
below the 50dma once again at 2059. That average is
proving to be significant resistance.

After the bell today there was news from Intel, FLEX,
HLTH, TIVO and SBL. SBL, a tech stock that trades on the
NYSE missed earnings by -2 cents and dropped -$2 in after
hours. While not a Nasdaq stock it is still a tech.
Intel was trading down about -60 cents, FLEX about -30
cents and AMAT -50 cents. HLTH and TIVO were up about
+70 cents each. The net impact to the Nasdaq at the open
should be a small negative bias and probably generate
some profit taking from today's gains. Considering it
closed on the upside of its recent range it is in no
apparent danger.

In advance of the Intel news the SOX rebounded off its
support at 500 and turned in a +1.62% gain to close
at 508. This should be high enough that any Intel/FLEX
impact should fade before the 500 level is reached.
(keyword = should)

The Russell blew out, literally. The Russell moved over
its Tuesday high and the highs for February at 597 to
close at 598.38. This is only three points from the
January highs and five points from an all time closing
high and a very strong performance. We are likely to get
some pullback at the open from the tech news but I view
any dip here as a buying opportunity. The Russell-2000
Ishares (IWN) broke out to a new all time high at 173.00.
(optionable)

Russell-2000 Chart - Daily



The Wilshire-5000 moved within 18 points of a post 9/11
high and being the broadest measure of the markets still
suggests the bullish undertone is continuing. Taken with
the Russell strength this is a clear signal that bears
should take to heart. The Dow is the current dog and
the most narrow of indexes. 18 Dow stocks failed to
close in positive territory today. Considering the
rally in small caps the Dow components could be
suffering from the same rotation that sent it to the
10750 highs at the beginning of February. Money that
went to the safety of big caps then is fleeing back
to small caps as we move into the time for an April
earnings run to begin.

Internals were surprisingly strong today with advancers
beating decliners nearly 2:1 and volume heavily weighted
to the advancers. New highs are surging again and new
lows are almost nonexistent.

In late news tonight the Banking Index BKX is splitting
10:1. The Philadelphia Stock Exchange announced today
that the index currently at 1017.77 was being split
to improve liquidity of the instrument and make it
more attractive to a diverse set of investors. The
index is up nearly 50% in the last year and outperformed
the S&P for the last four years. The BKX is comprised
of 24 national and regional money center banks. The
BKX is also optionable. The split is scheduled for
March 22nd.

For Friday our fate is tied to the Employment report
and there is nothing we can do about it. Assuming the
numbers are moderately decent I would continue to buy
the dips in small cap techs as they have been the hot
rods of late. Let the morning volatility fade and
check the market direction before entering tomorrow.
Remember, if the news is bad you can always wait for
Monday and avoid the weekend event risk and let
emotions die down. Cash is a position.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address. 

http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** This is as bullish and bearish as it gets I'm not sure why, but I feel bored. How about you? It's the same thing night in and night out. Tonight, I'm going to change things up a bit, look at some supply/demand charts, and make things look as bullish as I can. The ultimate test a trader/investor can apply to a security is make that chart look as bullish or bearish as they can, then let the chart, or the market tell them what to do. First, let's get the basics out of the way and take a quick look at today's market snapshot, where the MOST BULLISH things I observed today was that the small cap Russell 2000 Index ($RUT.X) 598.38 +1.19% broke back above its downward trend in more convincing fashion as if to show the other major indices what resumption of strength all about. The Dow Jones Home Construction Index (DJUSHB) 670.40 +2.57% saw constructive trade and closed at another all-time high. The MOST BEARISH observations I could make today is that the Dow Transportation Average (TRAN) 2,884.62 -0.11% traded yesterday's lows, and today's market gains came on rather light volume. Market Snapshot / Internals - 03/04/04 Close One could imagine that today's light volume trade may have had traders and investors sitting on their hands, waiting to see what, if anything surprising, Intel (NASDAQ:INTC) $29.65 +2.10% had to say midway through the current quarter. Not just Intel (INTC) either as tomorrow morning's February nonfarm payrolls (forecast is for 125,000 job creation) may also be one of those "wait and see" economic reports. Look at the number, or lack thereof, of new lows on the NYSE, and the steady 4 new lows on the NASDAQ. I can't say for certain, but when I see that, it has to at least hint of short covering, and locking in of gains by bears that don't want to risk those gains. I'm not saying that short covering is only limited to the few stocks that have hit new lows at the NYSE or NASDAQ, but if you're monitoring the "tail" or weakness indicators, then today's new low indications give hint that there wasn't a lot of conviction among sellers today. Look also at the Russell 2000 Index ($RUT.X) hourly time line. Them little buggers show a trade like an ascending roller coaster, where there were little bumps at the top of each our, but for the most part, show a nice steady build of price gain. Compare that to the Dow Industrials (INDU) 10,588.00 -0.05%, or the S&P 500 Index (SPX.X) 1,154.87 +0.33% and more choppy and bouncing trade, where there wasn't really a lot of conviction shown for the larger cap stocks. But let's face it. It takes some volume or interest to really get the bigger caps moving and Intel's mid-quarter update and tomorrow's nonfarm payroll data may have provided just enough uncertainty to keep traders and investors from making too many big bets today. Let's talk real quick about Intel (INTC) and its mid-quarter update. Let's deal with the FACTS first. Since early November, INTC has been finding resistance at $34.00, and the last two weeks has been trading relative lows of $29.00. The FACTS as I know them are that INTC's stock price is down 14.7% from its recent highs. In FACT, INTC is down just about 14.7% since it last traded $34.00 in early January. Another FACT is that INTC currently trades at $29.11 in after- hours trade, and while after-hours trade is not what I consider to be a true market response, where all traders/investors will cast their votes in the form of buying and selling, the FACTs also show that at $29.11, somebody's still buying above yesterday's close. Another FACT is that I profiled a bearish swing trade short in the Semiconductor HOLDRS (AMEX:SMH) $41.66 +1.65% yesterday at $41.00, stop $41.85, target $39.25 and all be darned if the after-hours trade low wasn't $41.00, and last tick in after-hours has been $41.40. Part of me thinks that the MARKET might have factored some "bad news" into the INTC mid-quarter update the past couple of months. Some fundamental notes had Intel narrowing its Q1 revenue guidance to $8.0-$8.2 billion, which was at the lower end of its previous range of $7.9-$8.5 billion and consensus estimate of $8.27 billion. (Analysts are very smart. Mid-point of $7.9 to $8.5 is $8.2 billion). Gross margins continue to be impressive and are expected to be 60%, plus or minus 1%, which was INTC's prior guidance. Intel added that "demand for the company's Intel Architecture products is consistent with the lower end of normal seasonal patterns and significantly higher than in the same period last year. Demand for Intel's communications products is in line with the company's expectations at the beginning of the quarter. All other expectations are unchanged." Pivot Analysis Matrix - I started marking some correlative levels on the pivot matrix for the equity sectors in the matrix, then it dawned on me, that the most important thing I could touch on tonight is the bond market and dollar. REMEMBER that nonfarm payroll numbers are due out tomorrow morning. The one thing we made note of in January, when nonfarm payrolls came out, is that the market response seemed to be favorable for the 112,000 jobs added in January (forecast was + 135,000), which was below economists' forecast, but the reaction in equities that session was actually more favorable than some might have thought. I think the KEY FACTOR for the nonfarm payrolls data (forecasted at + 125,000) is the "not too hot, not too cold, but just right," type of headline numbers. The thinking is "too hot" may push the Fed to tighten rates sooner than some would like, while a "too cold" number might harm future consumer confidence. I still think RATE OF CHANGE in Treasury YIELD and the dollar is the main thing to be alert too. I think the 10-year YIELD ($TNX.X) needs to stay between 3.91% and 4.277% if I'm looking for extremes. A QUICK/SHARP move outside that range would most likely see a lower stock trade, as STOCK TRADERS tend to sit on their hands (cancel buy orders) when they see SHARP movements in Treasury YIELD and even the dollar of late. I think we "know" that stocks can do just fine under a rising or falling dollar scenario, as long as the movement is gradual, and not SHARP. To get some perspective on where they've been and what economists' forecast, here's some recent history, along with economists' forecast for key payroll data due out tomorrow morning. Payroll data table - I'm not an economist, but when I look at the above table, I would think any addition of jobs needs to be ABOVE December's 16,000. If not, I'd have to view that as a negative, as the job market would then have to be considered weaker than December, when at the end of a calendar year, company's tend to limit hiring anyway. A "too hot" number? That's a tough one. Let's imagine that economists don't have it right and their estimate is too low. It may not make sense to some, but to throw out a number, I (Jeff Bailey) am going to take the difference between December's 16,000 and November's 83,000 (that's 67,000) and add that 67,000 onto the current forecast of 120,000 to come up with a "too hot" number of 179,000. IF ABOVE 179,000, I'd be alert to a SHARP rise in the DOLLAR and 10-year Treasury YIELD ($TNX.X), which might spook stock traders into selling. If we as stock market watchers have never seen a stock market shoot higher like a pop bottle rocket, then look for an nonfarm payroll number of 200,000 and a calm bond/dollar trade, and we might just get a fireworks show from equities. Let's look at some point and figure charts, where tonight, I'm going to change the box size scales, so these may be unconventional box size, to get the charts as bullish and bearish as I can. Dow Industrials ($INDU) - 40-point scale The above chart would depict that of an index that has been bullish since it traded 9,920 and triggered a triple-top buy signal. First sign of weakness would be a trade at 10,520. Past sell signals showed a minimum decline of 120-points before a 3- box reversal back higher was found. S&P 500 Index (SPX.X) Chart - 4-point box A 4-point box would be a scale a BEAR would like right now. It would show a "sell signal" at 1,140, with firm resistance below 1,160.00. Just like that found in November (red B to red C). Here we see some very similar supply/demand in play, as found late last year. NASDAQ-100 Tracking Stock (AMEX:QQQ) - $0.25 box A $0.25 box size chart of the QQQ makes it tough for me to be trying to short the QQQ, as it has pulled back to some major support. The last good trade I had on the QQQ was bullish at $36.25, and the QQQ has given me fits from both the long and short side of the trade. Sign of strength is trade at $37.25, while weakness would be $35.50, as the last time the QQQ traded right ON the upward trend at $33.75, it never went lower. The point and figure charts are from www.stockcharts.com. You can view some of YOUR favorite charts for FREE. Change the scales up and get them looking as bullish or bearish as you want. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** One Word: Cautious - J. Brown Investor sentiment can be summed up in one word: cautious. The markets traded mostly sideways on Thursday despite the general bounce across most sector indices. The strong buying in homebuilders was encouraging and even Internets got in on the buying spree with news from Ask Jeeves. Yet the real focus today was on Intel and its after hours mid-quarter report. Jim goes into much more detail in his wrap but the guidance from Intel sounds pretty bearish as they guided to the lower end of their range. Even so Intel was trading slightly higher after hours but this is not likely to last. Normally the Intel guidance would probably sink the semiconductor sector (SOX) tomorrow, which in turn would be a heavy weight around the NASDAQ's neck and impede any rally attempts. However, the February non-farm payrolls report could overshadow Intel's guidance. Right now economists are estimating that the economy added 125,000 new jobs last month, which is a gain from January's 112,000. If the report fails to meet or beat this number it could be a very dour day in stocks tomorrow. Fortunately, the ISM index and the ISM services index, both released earlier this week, showed that their employment component was expanding. This growth in employment has given the markets a silent hope for a positive number tomorrow. However, even if we win we could lose. There has been talk all week that if the jobs number is too big it will spark renewed fears of a rate cut sooner than expected. Here's the logic: a super jobs number will confirm that the economy is heating up and with commodities soaring the Fed may raise rates sooner than expected to curb inflation even though they continue to deny inflation is a potential problem. Opponents to this train of thought believe that it would take several months of super strong job growth to push the Fed's hand, which seems more reasonable especially during an election year. However, that may not be enough to keep traders from over-reacting to short-term moves. Internals today were pretty bullish but none of it matters if the jobs number doesn't deliver. Everybody hold their breath and cross their fingers. I'd rather deal with a short-term reaction to a positive number than the damage that might occur from another big miss. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10588 Moving Averages: (Simple) 10-dma: 10601 50-dma: 10546 200-dma: 9708 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1154 Moving Averages: (Simple) 10-dma: 1146 50-dma: 1133 200-dma: 1044 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 946 Current : 1481 Moving Averages: (Simple) 10-dma: 1473 50-dma: 1494 200-dma: 1363 ----------------------------------------------------------------- Much like the larger indices the volatility indices traded in a very tight range as investors wait for the Intel report after the close and the Jobs report tomorrow morning. CBOE Market Volatility Index (VIX) = 14.40 -0.15 CBOE Mkt Volatility old VIX (VXO) = 14.71 +0.10 Nasdaq Volatility Index (VXN) = 22.50 -0.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.71 669,444 475,721 Equity Only 0.60 547,185 326,334 OEX 1.87 13,694 25,554 QQQ 3.85 11,476 44,198 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 75.8 + 0 Bull Confirmed NASDAQ-100 60.0 - 1 Bear Confirmed Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 85.8 + 0 Bull Confirmed S&P 100 87.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.05 10-dma: 1.10 21-dma: 1.03 55-dma: 0.99 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1795 2025 Decliners 1035 1004 New Highs 300 209 New Lows 5 5 Up Volume 978M 1216M Down Vol. 519M 459M Total Vol. 1551M 1781M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/24/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 No change for commercial traders. They remain hedged either direction. Small traders haven't made many changes either and remain bullish. Commercials Long Short Net % Of OI 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% 02/24/04 417,490 416,502 988 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 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% 02/24/04 141,559 85,171 56,388 24.9% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 We're seeing a lot more action in the e-minis than the large contracts above. Commercial traders are bearish but have become slightly less so over the last week. As is typical the small traders moved the opposite direction and while bullish became less so. Commercials Long Short Net % Of OI 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%) 02/24/04 320,425 387,255 (66,830) ( 9.4%) 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 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% 02/24/04 129,894 63,524 66,370 34.3% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Not much change for the commercial traders in the NDX futures this week but we are seeing a change in the small traders' positions. There appears to be a bullish reversal with a large shift from shorts to longs. Of course a contrarian will note that the small trader is normally wrong so this could be a bearish development for the markets. Commercials Long Short Net % of OI 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% 02/24/04 47,266 40,452 6,814 7.8% 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 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%) 02/24/04 12,388 7,310 5,078 25.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Hmm... commercial traders have become more bullish on the Dow in the last week. Not much change from the little guys. Commercials Long Short Net % of OI 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% 02/24/04 27,176 13,918 13,258 32.3% 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 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%) 02/24/04 6,509 14,919 (8,410) (39.2%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** FREE TRIAL READERS ****************** 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. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter                  Tuesday 03-04-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: AET, AHC, ATH, CDWC, CFC, DHI, QCOM, RJR, RNR,
                   RYL, SLB, UNH
New Calls Plays: GS, MHK
Put Play Updates: CHIR, CTSH, MMM
New Put Plays: None


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

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


CALLS:
*****

None


PUTS:
*****

None


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Brokerage Group, addressing the demand for personalized,
experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
and Alan Knuckman specialize in live assistance of stock*,
option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

Live Broker and Online Trading Available     888-281-9569

http://www.OneStopOption.com

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

Aetna Inc. - AET - close: 81.26 change: +0.26 stop: 77.50

AET's CEO reaffirmed their forecasts for 2004 today but the stock
did not react very strongly.  AET merely continued its slow drift
higher after retesting very minor support at $80.50 early in the
session.  Hopefully the insurance sector will re-start its
previous bullish trend if the jobs report delivers and AET, near
all-time highs, should be a leader.  AET's position above $80
remains an attractive entry point for bulls.

Picked on February 29 at $80.79
Change since picked:     + 0.47
Earnings Date          02/12/04 (confirmed)
Average Daily Volume:       1.2 million
Chart =


---

Amerada Hess Corp. - AHC - cls: 65.09 chng: -0.34 stop: 63.00

Continuing its necessary consolidation following the strong move
earlier this week above $66, AHC is actually holding up quite
well, and a large part of that strength is due to a lack of
weakness either in the price of crude oil or the Oil Services
index (OSX.X), both of which are holding very close to their
recent highs.  AHC has spent most of the past two days trading
inside the range of Monday and Tuesday and this looks like a
healthy consolidation ahead of a renewed bullish move.
Aggressive traders can use dips that find support above the 10-
dma ($63.74) to establish new positions, while those looking to
enter on renewed strength will want to see a breakout over $66.60
before playing.  Note that our next upside target is the $68
resistance level, but as long as the stock and sector remain
strong, a continued rally up to the $72-73 resistance area is
possible. Maintain stops at $63.

Picked on February 10th at   $59.53
Change since picked:          +5.56
Earnings Date               1/28/04 (confirmed)
Average Daily Volume =        949 K
Chart =


---

Anthem, Inc. - ATH - close: 88.31 change: +1.01 stop: 84.00*new*

Shaking off its lethargy, ATH is starting to pick up some
momentum to the upside, blasting to new highs above $88 on
Thursday and making rapid progress towards our initial target of
$90.  With the breakout over $85 now looking quite strong, a
revisit to that level of support is looking less likely, giving
us the ability to raise our stop to $84, which is now just under
the 20-dma ($84.29).  The consolidation just above $86 was
probably the last chance we'll see to buy a dip before the $90
level is reached.  Conservative traders will want to harvest some
gains when that level is reached and then possibly look for a re-
entry opportunity on the next pullback.  With the proximity of
that $90 target, momentum entries don't make much sense right
here.  Bottom line is that there isn't much that looks viable for
near-term entry points, as the train has now left the station.
Traders unwilling to use a stop at $84 and risk giving back all
the recent gains can use a tighter stop just under the 10-dma
($85.84).

Picked on February 26th at   $85.37
Change since picked:          +2.94
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.43 mln
Chart =


---

CDW Corp. - CDWC - close: 71.63 change: -0.18 stop: 66.00

We were looking for some consolidation off of Monday's moon-shot
rally in shares of CDWC and that's precisely what we're seeing
the past few days, as the stock is coming back towards what
should be strong support in the $70-71 area.  We're already
starting to see some intraday support build near $71, and
aggressive traders can use this area as an entry point.  Those
with a more conservative approach can hold out for a test of
strong support near $70, as former resistance is tested, backed
up by the rising 20-dma ($68.93).  Until we see from what level
the next rebound begins, we're leaving a wide stop down at $66,
which is just under the 50-dma ($66.37).  If looking for a
momentum entry, then traders will need to wait for a fresh
breakout over $74.50, just over Monday's high.  That would not be
our preferred entry.

Picked on March 2nd at       $72.43
Change since picked:          -0.80
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     1.26 mln
Chart =


---

Countrywide Financial - CFC - cls: 92.64 chg: +0.54 stop: 86.99

As we suspected the pull back to $90.00 proved to be another
entry point in CFC's bullish run higher.  The mortgage lender
looks primed for a run toward our target at the $100 level.
Yesterday CFC announced that it would be presenting next
Wednesday, March 10th, 2004 at the Sandler O'Neill West Coast
Financial Services conference.  Usually these conferences are a
chance for management to offer positive comments that
occasionally generate upward share price movement.  CFC also
release news today that it has created a new joint venture with
Napolitano Homes.  The new venture, NCL Mortgage, will provide
homebuyers in Southeastern Virginia with various lending options.
There is no change to our stop loss but more conservative traders
might consider something closer to the $90.00 level.

Picked on February 24 at $91.63
Change since picked:     + 1.01
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       2.3 million
Chart =


---


D.R.Horton - DHI - close: 34.27 chg: +1.34 stop: 32.00*new*

Homebuilders surged to another new all-time high as the DJUSHB
index added 2.57%.  DHI helped lead the group higher with a 4.06%
gain of its own and another new all-time high as well.  DHI is
very close to our profit target so we do not suggest new bullish
entries at the current time.  As a matter of fact we're going to
set our official exit price at $34.75.  If DHI trades there or
above we'll close the play.  If the jobs report disappoints
tomorrow short-term traders might watch for a pull back to
support near $32.00 as a possible entry.  We're going to raise
our stop loss to $32.00. In the news DHI announced that its CEO
would be presenting next Wednesday at the JMP Securities Research
Conference.

Picked on February 08 at $30.00
Change since picked:     + 4.27
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       2.4 million
Chart =



---

Qualcomm, Inc. - QCOM - close: 62.57 change: +0.81 stop: 60.50

As expected, QCOM continued to consolidate on Wednesday, falling
back to test the 10-dma ($61.77).  Also as expected, that level
provided support for the next bounce, which got underway this
morning and it was a strong bounce too.  QCOM appears to have put
in another higher low in its aggressive upward trend and traders
that took advantage of the dip and rebound over the past two days
appear to have nailed a solid continuation entry.  Another dip to
test the 10-dma can still be used for re-entry, while momentum
traders will need to see a push through the $64 level before
adding to current positions.  It still appears that $60.50 is the
best level for stops, and we have the 20-dma ($60.19) rising
rapidly to reinforce that level.  Remember that our final target
for the play is $67-68, so plan your exits accordingly.

Picked on February 17th at   $59.55
Change since picked:          +3.02
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     8.87 mln
Chart =


---

RJ Reynolds Tobacco - RJR - cls: 61.58 chg: -1.54 stop: 59.00

Ouch!  RJR took a 2.43% hit today on some comments from
Prudential Equity firm.  The analyst there suggested that RJR and
its soon to be partner Brown & Williamson may have to divest some
of its cigarette brands to a third party in order for the FTC to
approve its upcoming merger.  RJR countered that they would not
since their efficiencies between the two companies would help
them better compete with larger-rival Phillip Morris (MO).
However, the specter of RJR having to sell some of its brands
would alter its revenue/profitability profile which would impact
its share price.  We would be cautious here and look for a bounce
above the $60.00 level to reaffirm support.

Picked on February 20 at $60.51
Change since picked:     + 1.07
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       699 thousand
Chart =


---

Renaissancere Ltd - RNR - close: 54.66 chg: -0.21 stop: 52.00

RNR turned in another strong session on Wednesday with the IUX
insurance index following behind with its own bounce from the 21-
dma.  Yesterday's gains may have been sparked by news from RNR.
The company raised its quarterly dividend 27% to 19 cents a
share.  Of course RNR has been strong the last few days prior to
the dividend news so it could be a coincidence.  Its next
dividend is payable on March 15th, 2004 to shareholders on record
as of March 9th.  Readers should note that RNR is quickly
approaching our first profit target range of $55 to $56.  The
recent highs the last two sessions have been $54.98.  Short-term
traders should be planning their exit strategies if they have not
already taken profits.  We're going to official exit the play on
any move to $55.95.  This is an amendment to Tuesday's exit plans
in the 56-57 range.  This close to our profit target we would
probably not suggest new bullish positions.  Yesterday we raised
our stop to $52.00.

Picked on February 15 at $50.83
Change since picked:     + 3.83
Earnings Date          02/03/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =


---

Ryland Group - RYL - close: 90.60 chg: +2.78 stop: 84.99*new*

Following in DHI's shadow, shares of RYL added 3.16% and out
performed the DJUSHB homebuilding index on Thursday.  Today's
move is strong confirmation from yesterday's test of support near
the $85 level.  RYL has already achieved our short-term profit
target of $90.00 and readers should already be planning their
exit strategy if they have not already taken profits.  We plan to
officially exit RYL if the stock can traded at $92.00 and then
look for another entry on an appropriate pull back.  In the mean
time we're raising our stop loss to $84.99.  We would not suggest
new bullish positions this close to our exit but the close over
$90.00 is very encouraging.  RYL did issue a press release
stating that its management would be presenting next week at the
Smith Barney Citigroup Global Industrial Manufacturing conference
on Tuesday.

Picked on February 24 at $83.96
Change since picked:     + 6.64
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       746 thousand
Chart =



---

Schlumberger Ltd - SLB - close: 65.37 change: -0.41 stop: 62.75

There hasn't been much weakness seen in the Oil Patch after the
strong push upwards earlier in the week and with both crude oil
and the OSX index holding near their highs, our SLB play is
following suit, holding onto most of its recent gains and
consolidating in bullish fashion above the 10-dma ($64.99).
Below $65 support, there is stronger support near $64, the site
of the most recent breakout, which is now reinforced by the 20-
dma (currently $63.91).  So long as the OSX remains strong, dips
to either of those support levels can be used for pullback
entries, while the next momentum entry will be seen on a breakout
over the $66.75 high from Tuesday.  Maintain stops at $62.75,
just under the late February reaction low.

Picked on February 24th at   $64.47
Change since picked:          +0.90
Earnings Date               1/23/04 (confirmed)
Average Daily Volume =     3.59 mln
Chart =


---

UnitedHealth Group - UNH - cls: 62.50 chng: +0.18 stop: 59.00

We had to exercise a fair amount of patience, but UNH finally
broke out over that pesky resistance near $62 yesterday and added
to those gains today, ending the day at a new all-time high of
$62.50.  It is still a rather tenuous breakout, but it is clear
that the bulls are still defending support at the bottom of the
rising channel.  Dips to that level (now near $61.40) can still
be used for fresh entry points, while a breakout over today's
highs can work for traders preferring to enter on strength.  The
next obstacle will be for UNH to get back into the upper half of
its rising channel above $63.50 and then we can set our sights on
the top of the channel near $66.  The HMO index is continuing to
push to new all-time highs (setting another one today at $919)
and as long as that trend continues, we can expect UNH to
continue its bullish trend.  Maintain stops at $59, which is
solidly below the 50-dma ($59.31).

Picked on February 24th at   $61.92
Change since picked:          +0.58
Earnings Date               1/22/04 (confirmed)
Average Daily Volume =     2.54 mln
Chart =



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

Goldman Sachs - GS - close: 108.52 chg: +2.01 stop: 104.00

Company Description:
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range of
services worldwide to a substantial and diversified client base
that includes corporations, financial institutions, governments
and high net worth individuals. Founded in 1869, it is one of the
oldest and largest investment banking firms. The firm is
headquartered in New York and maintains offices in London,
Frankfurt, Tokyo, Hong Kong and other major financial centers
around the world.(source: company press release)

Why We Like It:
Wow!  Can you believe it?  It seems like earnings season just
ended and now we're already looking forward to the next batch of
earnings from the broker-dealers.  Granted they do announce
earlier than the rest of the market but that doesn't mean we
can't ride them for a good old-fashioned earnings run.  GS is
expected to announce in about two weeks but to be honest we can't
confirm that date just yet.  In the mean time we have a sector
that is near all-time highs and looks ready to mount another
attempt at a breakout over the 750 level.  GS should lead the way
with today's breakout over short-term resistance at $108.00.

We do not plan to hold over earnings so if a two-week time period
is too brief for you be sure to know your limitations and sit
out.  We're going to suggest longs on today's move over $108.00
with stops at $104.00 - that's where GS bounced about a week ago.
The P&F chart suggests a price target of $120.00, which doesn't
seem too unreasonable but we'll re-evaluate as GS approaches the
$115 range.

Suggested Options:
Aggressive traders can speculate on March options.  Even though
we're not holding over the March 18th earnings date (estimated)
we're going to suggest the April 105 calls.

BUY CALL MAR 105 GS-CA OI=10759 at $4.60 SL=2.35
BUY CALL MAR 110 GS-CB OI= 4940 at $1.50 SL=0.75
BUY CALL APR 105*GS-DA OI= 8600 at $5.80 SL=3.25
BUY CALL APR 110 GS-DB OI= 9307 at $2.85 SL=1.45

Annotated Chart:



Picked on March 04 at $108.52
Change since picked:   + 0.00
Earnings Date        03/18/04 (unconfirmed)
Average Daily Volume:     3.2 million
Chart =



---

Mohawk Industries - MHK - close: 84.53 change: +1.35 stop: 79.50

Company Description:
Mohawk Industries and its subsidiaries, are producers of
floorcovering products for residential and commercial
applications in the United States.  The company is the second
largest carpet and rug manufacturer, and a manufacturer, marketer
and distributor of ceramic tile and natural stone.  Through its
carpet and rug business, MHK designs, manufactures and markets
carpet and rugs in a broad range of colors, textures and patterns
and is a producer of woven and tufted broadloom carpet and rugs,
principally for residential applications.

Why we like it:
There's no question that the strongest sector in the entire
market right now is Housing, and the $DJUSHB index tacked on
another 2.5% on Thursday to end at yet another new all-time high.
But it isn't just Housing stocks that are performing well, as the
entire food chain is getting in on the act.  Floorcovering of
some sort has to go into each and every new house and that fact
hasn't been lost on MHK investors, as they aggressively bought
the late-January dip and sent the stock soaring a month ago in
approval of the company's earnings report.  After consolidating
the initial move, MHK found support above the top of its post-
earnings gap and vaulted higher from the $80 support level.
After a few days of consolidating just below the early February
highs, MHK broke out strongly today, setting another new all-time
high.  The strength of the stock can really be seen on the PnF
chart, with a long column of X last month, giving a fresh  Buy
signal and a vertical count of $115!

That's obviously a far more aggressive target than we're going to
pursue in this play, but a breakout over $85 (which will create
another PnF Buy signal) should have a fairly easy time extending
up to the $90 level.  Once that initial target is reached, we can
re-evaluate and see whether it seems reasonable to target a move
up towards the century mark.  Today's breakout looked pretty
solid, but volume was less than convincing, leaving us with the
suspicion that we'll see a near-term pullback to confirm support
near $83 before MHK continues its upward climb.  So long as the
stock finds support above the 10-dma ($82.56), that dip can be
used for an entry point.  And of course, momentum traders can
enter the play on a breakout over today's high, which will
hopefully come on increasing volume.  As a point of confirmation,
monitor the $DJUSHB index for sector strength before playing.
Set stops initially at $79.50, just under the late-February low.

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
money.

Longer Term: Aggressive longer-term traders can use the April $90
Call, while the more conservative approach will be 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-80 MHK-CP OI=110 at $4.90 SL=3.00
BUY CALL MAR-85 MHK-CQ OI=189 at $1.40 SL=0.75
BUY CALL APR-85*MHK-DQ OI= 46 at $2.70 SL=1.25
BUY CALL APR-90 MHK-DR OI= 21 at $0.95 SL=0.50

Annotated Chart of MHK:



Picked on March 4th at       $84.53
Change since picked:          +0.00
Earnings Date               2/05/04 (confirmed)
Average Daily Volume =        348 K
Chart =



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

Chiron Corp - CHIR - close: 49.02 chg: +0.00 stop: 50.51

Unfortunately we don't have anything new to report for CHIR.
Actually we should probably be encouraged.  As the BTK biotech
index continues to hit new two-year highs shares of CHIR continue
to churn sideways under resistance at $50.00.  The intraday chart
actually seems to be growing weaker with a minor trend of lower
highs.  CHIR actually hit a new relative low of $48.50 this
morning before paring its losses.  Considering the environment
bears might want to wait for CHIR to trade under 48.50 before
initiating new positions.  Watch out for the Jobs report
tomorrow.  If there is any kind of upside surprise it may become
a tide that lifts all boats, including CHIR.

Picked on February 24 at $49.11
Change since picked:     - 0.09
Earnings Date          01/28/04 (confirmed)
Average Daily Volume:       1.7 million
Chart =


---

Cognizant Tech. - CTSH - cls: 45.77 chng: +0.57 stop: 49.00

It's hard to find a solid bearish trend in this market, but it
looks like we found one in CTSH, as the stock continues
delivering on its pattern of lower highs and lower lows.  The $46
support level finally cracked yesterday with a close just over
$45 and it was encouraging to see that even with the 1% gain in
the NASDAQ, the stock couldn't get back over the $46 level today.
That said, the stock is probably due for a bit of a bounce and a
subsequent retest of the 10-dma ($47.12), which has been
providing consistent resistance for the past several weeks.
Conservative traders would not be foolish to harvest some gains
near current levels and then look for re-entry on the next
rollover near the 10-dma.  We're maintaining our stop at $49,
which is just over the intraday peak from 2/27, and is now above
the 20-dma ($48.99).  With all the congestion between $44-46 and
our eventual target of $41 so close to the bottom of that range,
we are not recommending momentum entries on a breakdown.

Picked on February 19th at    $47.49
Change since picked:           -1.72
Earnings Date                2/10/04 (confirmed)
Average Daily Volume =      1.31 mln
Chart =


---

3M Company - MMM - close: 78.89 change: -0.06 stop: 81.50

Given the lackluster trading pattern in the DOW over the past 2
weeks, it is really no great surprise that MMM can't figure out
what to do with itself.  The downtrend is still intact, with a
healthy pattern of lower highs, but there's not really any
conviction to the downside yet, as the $77.50 support level is
still holding firm.  Remember that we really need to see the
stock trade the $77 level to give us a PnF Sell signal and
solidify the downtrend.  Resistance has been consistently found
just under the 30-dma ($79.78) for more than a month now, so the
next test of that average could prove pivotal.  A rollover below
$80 still looks good for new entries, while those waiting for
confirmed weakness will still need to see a drop under the $77
level first.  Until that support gives way, we'll maintain our
stop at $81.50, just over the mid-February peak.

Picked on February 15th at    $79.68
Change since picked:           -0.79
Earnings Date                1/20/04 (confirmed)
Average Daily Volume =      2.79 mln
Chart =



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

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The Option Investor Newsletter                  Tuesday 03-04-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Brokers, Education, Insurance and more
Traders Corner: Ask And Ye Shall Receive – An Answer
Traders Corner: Creation Out Of Chaos
Traders Corner: TYPES OF CORRECTIONS AND OVERBOUGHT/OVERSOLD

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

Brokers, Education, Insurance and more

___________________________________________________________________

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.
___________________________________________________________________


Merrill Lynch - MER - close: 64.23 change: +2.13

WHAT TO WATCH:  Merrill Lynch added 3.42% today, breaking out
over resistance at the $63.00 level on better than average
volume.  The entire broker-dealer group looks pretty strong and
the sector index could challenge its all-time highs soon near
750.  Investors could be betting on an earnings run as the
brokers prepare to announce their latest profit numbers in mid to
late March.  MER's next resistance level is 67.50 to 70.00.

Chart=


---

Apollo Group - APOL - close: 80.08 change: +2.26

WHAT TO WATCH:  Shares of APOL pulled back to their rising simple
50-dma while rival educator ITT Education (symbol: ESI) plummeted
on news of a federal investigation.  Brave traders who bought the
dip have been rewarded as APOL has now broken out above
resistance at $80.00 to hit another new all-time high.  The
recent rallies have been fueled by strong volume and APOL looks
like a decent candidate for long positions.

Chart=


---

American Intl Group - AIG - close: 74.98 change: +0.28

WHAT TO WATCH:  The IUX insurance group has recently bounced from
its rising 21-dma after a couple of weeks of much needed
consolidation.  Likewise we see AIG, one of the largest insurers,
bouncing from its own 21-dma and preparing to breakout to new
highs.  Traders can use a move over $75.50 as a trigger to go
long AIG and target $80.00.

Chart=


---

Mobile Telsys - MBT - close: 114.40 change: +4.39

WHAT TO WATCH:  Shares of MBT, the largest mobile phone operator
in Russia and Eastern Europe, hit another new high today after
announcing that its subscriber base jumped 4.6% in February.  We
can't find an earnings date for the company but traders may want
to watch MBT for a pull back to the $110 level or a dip back
toward its simple 21-dma.

Chart=



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

LAB $12.10 +1.42 - Labranche soars 13% on very strong volume as
the company agrees to a settlement over the SEC's investigation
in improper trading by specialists.  The stock may be reacting to
the settlement news and hopes that LAB, as a company, can put it
behind them.

X $38.63 -0.15 - United States Steel recently broke out above
resistance at the $37.50 level and shares have dipped backward to
retest this mark as support.  Unfortunately volume was
excessively high on today's 15-cent drop, which might suggest big
investors taking profits.  Look for a bounce.

Homebuilders: Keep an eye on the homebuilders.  Many of the
players are breaking out to new all-time highs.  A few stocks to
watch in the group: LEN, PHM, KBH, SPF, HOV, CTX, TOL, HOV, BZH,
WLS.


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

Ask And Ye Shall Receive – An Answer
By Mike Parnos, Investing With Attitude

Among our CPTI couch potatoes, there are a few new spuds in need
of a little clarification on the bull call spread strategy we
discussed last Sunday.

The Trend Is Your Friend – Or Is It?
The momentum monkeys are scratching their heads (among other
things) because the markets are no longer trending.   They spend
hours looking for moving average crossings, for volume/price
divergences, and for news that will inspire trading opportunities.
CPTI students spend hours scouring the TV Guide and Tiffany ads.

We, at the Couch Potato Trading Institute, do indeed welcome back
a churning, range-bound market that’s going nowhere in particular
and is taking it’s own sweet time getting there.  Why?  Because
time is on our side.  Fortunately, markets only trend about 15% of
the time.  The rest of the time, they’re playing in our ballpark.
Once again, when we use our neutral strategies with comfortable
cushions, we have the odds in our favor.

The momentum monkeys had their banana.  Now, as the market stalls,
it’s time for CPTI students to enjoy a feast.
_____________________________________________________________

Mike,
Hi and thanks for the awesome content!  I attended a very
expensive seminar and I’m confused.  Your example scenario was:
With the stock at $41.98, you said to buy 1 contract IMCL April
$35 call for $8.10 and sell 1 contract IMCL April $40 call for
$4.40 for a total debit: $3.70.

Question (1) – At the seminar, we were taught that a $5 spread
should cost less than $1.60 or sell for less than $3.40... This
Bull Call Spread appears to be (selling?) a "credit spread" for
$1.30.  How can you figure out what is acceptable to pay for /
receive on this kind of trade?

Question (2) -- Max profit occurs at expiration when the time
value extrinsic evaporates, but the SHORT $40 is ITM and I'm
probably going to get assigned - - correct? Will buying back my
short ITM call for a nickel, two days prior to expiration, prevent
this?  (I've never been assigned).  Steve.

Steve,
Question (1): Years ago I monitored a similar seminar.  Some of
the information was valuable, but some was . . . misleading.  The
further you go out of the money, the less the spread will cost
you.  But, the stock will have to move a lot further to become
profitable.

Last Sunday, we examined a few scenarios: a) when the stock needs
to move up to be profitable, and b) when the stock doesn't need to
move at all to be profitable.

I'm lousy at predicting direction.  The markets, like people’s
emotions, can turn on a dime – euphoria one day and depression the
next.  One thing, however, is constant in the markets – the
regression to the mean.  In lay terms, that means that, over time,
and regardless of the chaos, the markets will settle down and
trade in a range.  Supposedly, the markets only really trend 15%
of the time.  That’s why neutral (directionless) strategies are
most successful – and less risky.

So, for me (and traders like me), it may worth the risk of $3.70
to make the $1.30.  I can always exit the trade if the value goes
down and limit my risk to whatever figure I'm comfortable with.
The whole thing is based on risk tolerance.

How much of a credit is acceptable for the in-the-money bull call
spread?  That’s a personal decision.  It depends on how much of a
cushion you will have, how much premium you take in, the support
and/or trend lines, your account size and how you sleep at night.

As you discovered, there are those who promote the concept of
placing the trades far out of the money so they can say you only
having to be right one out of four times to be profitable.  Hey,
the numbers work.  Why stop there?  If we go further out of the
money (buying the $50 calls and selling the $55 calls), one would
only have to be right about one out of seven times to be
profitable.  That’s a lot of room for error, but the stock would
have to make a huge move.   Once again, it’s a matter of personal
preference.  I'd rather position myself to make money if the stock
goes up, stays the same or even comes down a bit – even if it
means making less.

Question (2): You're not likely to be assigned as long as there is
still time value in the short option ($40 call).  If the stock
moves so far to the point where the time value is gone, you should
have closed the position earlier once you achieved about 75% of
your potential profit.

If the stock is trading above $40, you won’t be able to buy the
short $40 call back for a nickel because it will still have some
intrinsic value.  If we’re wrong about the bull call spread and
the stock goes down dramatically, you will need to buy back the
short call before you can sell the long call to salvage some of
the initial cost of the spread.

Buying back a short call (or put) is valuable when you’re using
credit spreads.  In a credit spread, when the underlying moves far
in the right direction, it’s wise to buy back an almost worthless
short option to free you from your obligation.
_____________________________________________________________

Hi Mike!
I enjoyed your article this weekend on the bull call spread. One
question that I have though -- is there any maintenance
requirement since this is a debit spread?  I don't believe you
mentioned any.  Thanks! JK

JK,
There really shouldn't be any maintenance requirement because you
are not exposed for losses over and above what you paid for the
spread.

Remember, the bull-call spread is an interesting strategy – but
used primarily by those who want to choose a direction.
_____________________________________________________________

Hi Mike,
Instead of paying $3.70 for the bull-call spread, wouldn’t you be
able to accomplish the same thing by using a bull-put spread?
What’s the difference?  Lisa

Lisa,
Yes, Lisa, you can. Obviously you’ve been around the block a few
times.  You’re ahead of the curve.  A bull-put spread is a credit
spread.  That means that we’re taking money INTO our account.
We’re still picking a direction (bullish).  We might be able to
take in the same $1.30 of credit with a bull-put spread using
strike prices BELOW where IMCL stock is trading.

The object will then be for IMCL to finish above the short strike
price (out-of-the-money) and for both put options to expire
worthless.  Should that happen, we save two commissions.
_____________________________________________________________

MARCH CPTI POSITIONS

Position #1 – OEX (S&P 100 Index) Iron Condor – 568.32
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:
$12,000.

Position #2 – RUT (Small Cap Index) Iron Condor – 598.38
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:
$8,000.

Position $3 – MNX (Mini-NDX Index) Iron Condor - $148.14
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 - $150.35
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.
______________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $36.76
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 – 568.32
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
24/7.
____________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.

Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.


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

Creation Out Of Chaos
by Mark Phillips
mphillips@OptionInvestor.com

Any application of intellect to the solution of a vexing problem
must by definition require the use of the creative centers of our
brains.  I'm an analytical person and struggle when I have to
operate in this mode.  My brother on the other hand is entirely
creative and is in his element when trying to fuse seemingly
disparate pieces together.  The one general statement I can make
is that the process of creation is ugly.  Partway through the
process, we can expect to see bits and pieces of whatever we're
trying to create strewn about the desk/workbench/room/house and at
first glance it would appear nothing more than a haphazard
collection of stuff.  It is at the core of what we call creativity
that all of these disparate pieces are fused together, creating a
whole that is greater than the sum of its parts.

I suspect even the Almighty had a couple moments where the whole
creation of the world was looking pretty chaotic.  Say what you
want about it, I think he did a good job -- the platypus and emu
notwithstanding.  Unfortunately, we don't have omniscience or
omnipotence going for us, when we're trying to create a trading
system out of thin air.  If we did, then I certainly wouldn't have
fallen victim to technology issues and this article would have
been posted last night in its usual time slot!  GRIN

Alright, last week we laid out most of the basic parameters which
a good trading system must adhere to and it is time to now delve
into the meat of the matter -- what actually goes into our trading
system.  By now, we've defined the goals of our system.  Now we
need to see if we can create one that satisfies those goals.  To
keep things simple in the early going, it is easiest to build our
trading model applied to just one symbol and then after we're
happy with the first iteration, we can apply it to other symbols
to determine how robust it is.  For no particular reason, I'm
going to use CSCO (from last week's initial list) as our case
study for our efforts here together.

Now I need to clarify what my purpose is in this series of
articles.  Recall that I'm not trying to build a successful system
in these pages -- if I was, we'd be hashing this out well past
Memorial Day due to the space limitations we must work with.
Instead, I'm endeavoring to do something much more valuable --
show the steps involved in building a solid trading system so that
anyone that is interested in creating one of their own will have a
roadmap to follow.

Our starting point must be in the application of some technical
studies, which we then observe how they behave in terms of
generating profitable trade signals.  If the success rate is
sufficiently high, then we have a rule (or set of rules) that we
can incorporate into our overall system definition.  Some of the
more common tools that can be brought to bear on this thorny
problem are various oscillators, moving averages, chart patterns
and we can even incorporate candle patterns and chart patterns
from the PnF world.  There is a virtually endless series of
combinations that can be applied to price action in the pursuit of
a profitable trading system.  What we must keep in mind at all
times is the requirement that if we want an automated trading
system, any rule must be capable of being translated into computer
language.  Strong signals and weak signals cannot be
differentiated by the computer unless we give it some way of
making a cold and calculating decision.  As you can see, if we are
successful in our venture, we will have an end product that will
have removed much if not all subjectivity from the equation.

Let's assume that we want to keep our system simple and we will
use only moving averages and oscillators for defining entry and
exit criteria.  That still leaves the field wide open, as we have
to determine so many settings.  How many moving averages will we
use?  Simple or exponential?  What periods seem to work the best?
On what timeframe chart do we find the most reliable signals?  Can
different timeframes be combined to enhance results, or should we
just stick with a single timeframe?  How about oscillators?  Which
one or ones provide the cleanest and most reliable signals?  What
settings are optimal -- giving signals on a regular basis
(remember we're looking for at least 2 trades per month) without
excluding the big potential winners, while at the same time
avoiding the trap of getting caught in too many small losers?
These are all great (and necessary questions) and the process can
be a bit daunting at first.

We can peruse chart after chart and each snapshot can give us a
different setup that seems to work.  What we have to do is observe
what we see on the charts, then translate that to some initial
'rules' and then test those rules against price action and see if
they yield profitable results.  If not, then we discard or modify
that potential 'rule'.  If it provides a sufficiently high success
rate, then we file it away as a viable system rule.

Then we go back to the charts, make more observations, build
another test 'rule' and test it for viability.  When we've
finished this process, we have a set of rules that on their own
appear to have favorable results.  The next step is to see if
results are improved or diminished by any combination of the rules
that passed the first test.  As you may quickly infer, this
process is prohibitively time-consuming without a computer program
like Trade Station in which we can program the system rules and
let it run unemotionally through historical data and give us the
hard data.

Just the definition of one successful rule is more involved than
we can possibly cover in sufficient detail here, but let's begin
the process so you can see how it works.  Let's start with a very
simple approach, that of the application of the 50- and 200-pmas
on various timeframes.  We know that the cross of the 50-pma over
the 200-pma on the daily chart is one of great technical
significance, as it often marks the transition between a bullish
and bearish trend.  So let's start with the premise of trading
crossovers of these two moving averages and then successive tests
of the 50-pma on various time-frames.  Applied to the daily chart,
there will clearly not be nearly enough trade signals to satisfy
our requirement for a minimum of 2 trades per month.

That leaves us with no choice but to dial down to shorter time-
frames and see if there is something viable.  Since not all
charting programs will allow us infinite flexibility in setting
our chart time-frames, let's start with an eye towards the more
common values of 60-min, 30-min, 15-min, 10-min and 5-min charts.
Obviously, the first step is simply to pull up charts of CSCO
using each time-frame, with only a 50-pma and a 200-pma shown and
look at both the crossovers and the retests of the 50-pma and ask
ourselves if it appears (strictly from inspection) that a viable
rule can be written.  If price just chops through the moving
averages with an apparent lack of consistency, obviously this
moving average rule will not work on that time-frame.  By going
through this process, we should be able to formulate a rule that
specifies over what time-frame(s) work best and how we can best
manage entries and exits.

Just detailing that simple exercise with annotated examples will
require another whole article and that will be the topic of
conversation for next week.  In the meantime, let me invite those
of you that are interested to embark on this little research
project so that we can compare notes in the next installment of
this series.  I can promise you that if you go through the
exercise on your own, and then come back to the discussion next
week, it will be infinitely more valuable to your understanding of
this overall process.

So here's my challenge.  Look at CSCO on each of the chart time-
frames listed above, applying just these two moving averages and
observing (I would highly recommend taking notes as you do) what
appears to work and what doesn't.  Look at enough data so that in
each time-frame you have observed several transitions (at least 4-
6) between the bullish and bearish alignment.  Remember bullish is
with the 50-pma over the 200-pma and bearish is with the 50-pma
below the 200-pma.

This is at the very heart of what we must do in the early stages
of system development.  Just plunging blindly into programming a
system without going through this process of discovery will be
both frustrating and unproductive.  On the other hand, actually
going through this exercise will provide many insights into the
interrelationships between the different time-frames, as well as
technical analysis as it applies to system development.

So have fun perusing the charts this week and we'll have some fun
with lots of charts next week!

Mark


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

TYPES OF CORRECTIONS AND OVERBOUGHT/OVERSOLD
By Leigh Stevens
lstevens@OptionInvestor.com

OIN SUBSCRIBER QUESTION:
In your recent Index Trader article you said that if rallies
can't get above the 21-day moving averages, it would suggest that
the indexes might fall to the lower moving average envelope you
were using. I noticed the S&P got above this average but then
fell back but not by much.  The Nasdaq couldn't get above its
average but hasn't fallen a whole lot either. Both are staying
close to the average.  Is there something that this tells you
about the direction in the next month?

RESPONSE:
Yes.  The market is now going sideways or has become "trendless"
as some would call it.  I consider a sideways trend to be a
trend, but others would say that it's the absence of a trend.
The market goes into these sideways moves fairly often after an
initial sustained advance or decline.  When this happens, I
figure that this situation is telling us a couple of things:

1.  The sideways move appears to be a "consolidation" (of the
2.  prior price swing) rather than a reversal of the dominant
3.  trend even in the case of the Nasdaq it seems – holding its
4.  own above 2000 in the case of the Composite (COMPX).

A reversal usually begins with a move that "retraces" more of the
prior trend - for example, a third to half or even as much as two
thirds of the previous move.  That has happened in the case of
the Nasdaq 100 (NDX), which has retraced more than 50%, but not
quite 62% of the move from the double bottom low to the peak of
the rally, as you see here.




In the S&P segment of the market, it is more of a sideways trend,
not much of a retracement at all.  This situation also
demonstrates that buyers and sellers are pretty well in balance.
The market is marking time, waiting for more influences or market
moving reports or for earnings season, etc.  It also says,
selling premium as in short options is going to be better than
being long calls or puts.  The time premiums start eroding as a
sideways trend continues and volatility dries up.

2. The market is also showing us that its "overbought" situation
– and you may recall me saying that the market had gotten too
overbought to continue to go further up without a correction
setting in first – might be offset by a "time" correction or
sideways price movement.

Corrections can be in price or time – or some of each. PRICE: the
index retraces some portion of the prior move but less than two
thirds (Nasdaq) OR prices mark time and go sideways (S&P) –
you'll notice that as far as stochastic or RSI type indicators,
the results are pretty much the same, just not as quick. The
lines being to move down again, away from the high extremes.





"OVERBOUGHT" AND "OVERSOLD" -
You see these terms bandied about all the time, especially by the
talking heads on CNBC and in the other market media.

The first I try to point out is that "overbought" and "oversold"
are ALWAYS RELATIVE terms or concepts. Overbought or oversold
means that a stock or index is thought to be at an extreme (on
the downside or upside).  But a stock or an index is only "over"-
bought or "over"-sold in terms of TIME and CONDITION.

TIME –
By time I mean - are you talking about intraday, on a 2-3 day, 2-
3 week or 2-3 month time frame? A stock or index is thought to be
at an extreme only relative to, or in terms of, a certain period
of time. For example, the OEX might be thought to be quite
oversold because it went down sharply down for 5 straight days.
However, this might be in the context that the index went up
strongly for 5 straight weeks or, 5 consecutive months.

In this example and its shown below with the S&P 100 or OEX, on a
longer-term basis the index is not oversold, and may in fact be
considered to be still "overbought" after even a period when the
index has fallen, at least from its peak.







When you hear someone say the market is overbought or oversold,
you should next think about what time frame they are they talking
about – assuming they KNOW what they are talking about and not
just repeating something that they have heard.

CONDITION –
By "condition" I mean that the relative terms overbought and
oversold mean different things in different market conditions or
different types of markets.  By this is meant that overbought and
oversold are best defined in a market that is in a fairly defined
trading range; for example, take a cyclical stock like Alcoa (AA)
for the period shown -





When the stock has been in the 20-24 range is was "oversold" –
when it’s been at 40-44 it has been "overbought" and sold off
quite substantially from there – again, for the period shown.  I
am not trying to make too sweeping of a statement here.

In a strong bull or bear market on the other hand, the
overbought/oversold concepts, especially in the indices, are less
meaningful as they will tend to go up and keep going up and stay
"overbought", according to the conventional technical indicators
for these things (e.g., MACD, Stochastics or RSI), for lengthily
periods of time.

The same is true in a bear market and we don’t have to search far
for examples in this last year! The conventional technical
indicators that attempt to define the relative concepts
overbought and oversold are going to say that the market is
oversold, and oversold and again, oversold!




SOME BASICS –
An index, or an individual stock, is commonly thought to be
overbought or oversold when prices have an advance or decline of
a degree that is greater than what is normal or usual relative to
its past price behavior for a certain time frame and condition.

Take, for example, the case of a stock that for five months, or 5
years even, has never traded at a price that was greater than 10%
of its closing average for the prior 200 days.  Then comes a
period when there is such a steep advance that the stock reaches
a price that puts it 20-25% above this same average – this stock
may be considered to be "overbought".  Overbought here implies
simply that any surge in buying well in excess of what is usual
on an historical basis, also creates a likelihood that the stock
price will correct.

Another example of an overbought condition might make an
assumption about a stock that has closed higher for 10 days
straight – if this price behavior is "over" or beyond what is
usual for this item, the assumption is that prices are vulnerable
to snapping back – a rubber band analogy is a good one, as market
valuations get stretched, so to speak, but then tend to also come
back to a mean or an average.

The concept of overbought and oversold refer to rallies or
declines that are steeper than usual, but the degree of this can
vary a good deal in terms – there is no precise, objective or
agreed upon measurement.

The first example mentioned of overbought is a more objective
measure in that it examined the close in relation to an average
close of the prior 5-years.

The second example given of overbought was based on more
subjective criteria -- 10 days of consecutive up closes resulted
in an extreme reading on an oscillator or type of technical
indicator that "oscillates" between 0 and 100 like the Relative
Strength Index (RSI) or between certain levels in the context of
its past range in values like the MACD indicator.

A central important aspect of overbought or oversold is that the
concepts relate to a situation where there is a preponderance of
hours, days or weeks, over some specified period of time, where
prices are moving strongly up or down.

The concept of a specific price area that represents a level that
is overbought or oversold does not normally come into play –
only that price momentum or the rate (speed) at which prices
change, is stronger than usual and predominately in one direction
and experience suggests that at some point, after a market gets
into the overbought or oversold ranges, there is an increased
likelihood that there will be a price correction or counter-trend
move.

USE IN TRADING –
The "best" or most effective use for oscillator type indicators
is in a trading range market. More on this in another Trader's
Corner – meanwhile, please e-mail any questions of a technical
sort.  I don't do advice to the lovelorn, love-worn, etc.


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