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Daily Newsletter, Thursday, 03/11/2004

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The Option Investor Newsletter                Thursday 03-11-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Market Terror
Futures Markets: See Note
Index Trader Wrap: It takes a village
Market Sentiment: Running for the 200-dma


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      03-11-2004           High     Low     Volume   Adv/Dcl
DJIA    10128.38 -168.50 10321.41 10120.38 2.36 bln  756/2516
NASDAQ   1943.89 - 20.30  1982.58  1943.89 2.18 bln  876/2276
S&P 100   544.16 -  8.64   554.14   543.63   Totals 1632/4792
S&P 500  1106.79 - 17.10  1125.96  1105.87
W5000   10821.48 -157.90 11004.68 10814.88
SOX       473.84 -  2.50   487.19   473.61
RUS 2000  568.74 -  6.27   581.02   568.70
DJ TRANS 2796.00 +  7.50  2848.01  2783.48
VIX        20.67 +  2.00    20.69    17.63
VXO (VIX-O)21.71 +  2.91    21.71    18.35
VXN        26.58 +  0.53    26.68    25.48
Total Volume 5,006M
Total UpVol    918M
Total DnVol  3,969M
Total Adv  1869
Total Dcl  5430
52wk Highs  170
52wk Lows    46
NasTRIN    1.08
TRIN       2.41
PUT/CALL   1.20
************************************************************

Market Terror

The terrorist attack in Spain that killed 192 and injured
over 1400 bombed our markets as well. The indexes opened
down but well off the overnight reaction lows. After an
attempt to rally that lasted until after 2:00 bad news
sent them down again.

Dow Chart - daily


Nasdaq Chart - Daily



The second news blow came when Spain reported that a van
with explosives had been linked to the bombings and there
were Arabic tapes in the van with verses from the Koran.
Shortly after that sound bite Reuters broke a news story
from England saying Al Queda had claimed responsibility
for the bombing in a letter to a newspaper. The letter
reportedly claimed a similar attack was imminent in the
United States. Traders hit the sell button and the bottom
dropped out of the market at 2:30. American officials were
quick to point out that Al Qaeda does not normally claim
responsibility for attacks and suggested the letter was
bogus and designed to shift blame from the real suspects.
The markets did not care and fear became the motivator into
the close.

The morning economics did not help market sentiment with
Retail Sales coming in flat for February once autos were
removed. Department stores held their own but drug stores,
grocery, sporting goods and furniture stores all declined.
Rising energy prices were blamed for robbing consumers of
cash available for discretionary purchases.

Import prices rose +0.4% and export prices rose +0.6%.
Analysts said the falling dollar, higher commodity prices
and higher energy prices were blamed. Consumer goods
remained unchanged with autos and parts up +1.0%. This
was not a factor in today's market.

Jobless claims continued to fall at 341,000 and continuing
claims fell to a post-recession low of 3.032 million. This
is good news but it was overshadowed by the global events.
The very slow drop in claims continues to show there is
no pickup in hiring but as we all know jobs are a lagging
indicator in a recovery. At least that is what they keep
telling us as an excuse for no jobs. Greenspan said today
that jobs will pickup soon because he is continuing to
see increasing signs of a pickup in the economy. Somebody
get him a new speech.

It was not economics that tanked the markets today but the
terrorist attack. The markets actually rebounded off their
overnight lows when news of the bombing first hit. The
blame was first placed on the Basque separatist group, ETA,
and the markets shook off the news thinking it was an
internal matter for Spain. The Dow rallied back from the
morning low of 10228 by nearly +100 points to 10321 before
the van was found. That announcement knocked -55 points
off the index but it again rebounded when authorities said
there was nothing conclusive in the evidence. The news that
caused the implosion was the Al Qaeda letter claiming another
attack was imminent. "We bring the good news to Muslims of
the world that the expected 'Winds of Black Death' strike
against America is now in its final stage...90 percent
(ready) and God willing near," the letter said. The al-Quds
al-Arabi newspaper received similar letters from the same
brigade claiming responsibility on behalf of al Qaeda for
a November bombing of two synagogues in Turkey and the
August bombing of the U.N. headquarters in Baghdad. This
was the kiss of death for the struggling rebound. France
also announced they were raising the terrorist threat
level on all public transportation.

The damage to US markets was severe. The Dow had held above
the 100dma at 10218 all morning but after the Al Qaeda news
blew right through that level and barely blinked as it
passed 10200. Were it not for time expiring on the clock
we might have broken 10100 as well with the close at 10128.
This is a major blow to any bullish sentiment still remaining.
In four days the Dow has dropped over -500 points with -168
of those being lost today. Since the market high of 10753 on
Feb-19th the Dow has lost -5.8%. It has been 19 months since
we have had a 5% correction and we normally have 2-3 per
year.

The Nasdaq dropped nearly -40 points from the afternoon
high and closed at 1944 after the Al Qaeda news. This is
below all the averages except for the 200dma which is still
quite a ways off at 1873. However, since the Nasdaq high on
Jan-26th the Nasdaq has lost -209 points or -9.7% and is
very close to the benchmark -10% range. This is a huge
change in investor sentiment despite continued upgrades
to earnings estimates. The next major support is at 1900.

Now that we are out of our Jan/Feb trading range and have
broken all short term support where are we going? We have
officially lost the required five percent to be recognized
as a real dip and the Nasdaq is very close to -10%. In
theory we are due for a rebound. In practice we could
easily hit Dow 10000 and Nasdaq 1900 with any additional
negative news. Fears of another attack on U.S. soil sent
the VXO back to near 22 from its low of 14.09 last Friday.
This is a major fear reversal. It rose nearly three points
today alone.

Before I tackle the forecast there was some good news
today. Declining volume beat advancing volume better than
4:1. Decliners were 3:1 over advancers. Volume spiked to
over 5.0 billion shares and the biggest day since Jan-29th.
The majority of this volume came in the last hour and it
could be seen as a news washout. A potential capitulation
day when considering it came at the end of an already
oversold condition.

There was also some positive stock news, which was ignored
due to terrorist concerns. GE affirmed estimates today and
said they were continuing to see an increase in global
growth. GE fell -0.68 on the day but it failed to break
its 200dma. This is huge support on GE and it should be
very difficult to break without any major external event.
The addition of the $3.8 billion in new shares has been
weighing on GE but the 42 million shares traded today may
have put an end to that pressure.

Intel has already broken its 200dma from last weeks lowered
guidance but it closed right at strong support today at
$27 that dates back to September. Intel traded 98 million
shares but only fell -.23 cents. This could be a bottom
for Intel. Also at critical support levels is Microsoft
which closed at $25 and very strong support. MSFT traded
90 million shares and only fell -.28 cents. Dell actually
gained +.74 cents today and this was the third day of an
uptrend by Dell. It is back over $32 support. The SOX
turned in an amazing display of strength with a loss of
only -2.45 and a solid grip on the support at 475. Just
another indication that maybe we are too oversold.

SOX Chart - Daily



National Semi announced a $400 million stock buyback and
made positive comments about orders and margins for the
current quarter. Altera announced their mid quarter update
after the bell and said it expected revenue growth at the
high end of its previous estimates. Oracle reported earnings
after the bell and said software license growth was up +13%.
Yellow Roadway said first quarter business was booming and
the stock jumped +10% and helped keep the transportation
index in positive territory despite the broad market crash.
First call said earnings estimates for the first quarter
had climbed to +14.9% growth from +13.4% just a couple
weeks ago. Earnings are growing despite the worry over
the economy. Fannie Mae said rates have fallen so low
that they expected a fourth consecutive year of record
home sales and increased their estimates by +100,000
homes for the year. They said demand was so strong and
inventory so low that housing prices should rise +7.4%
in 2004 after a similar +7.5% gain in 2003. 30-year rates
dropped to 5.41% and the lowest since July-2003.

Good news was breaking out all over and many of the major
players are holding at strong resistance. The challenge
for the day was clearly terrorist related and it may have
been a market blessing in disguise. It forced us to lower
levels and flushed another billion shares of volume that
we probably would not have seen. Tomorrow is light on
economic reports with Business Inventories and Consumer
Sentiment. Inventories could be a challenge but it is not
expected to be a market mover. A positive surprise could
be a good sentiment boost. Unfortunately Consumer Sentiment
is likely to come in lower once again. The election mud
slinging on the economic outlook could again drop the
numbers. Fortunately this week's terror event, the market
drop, Intel guidance and the Jobs report all occurred after
the majority of polling took place. The next report is the
one to worry about.

Now back to the forecast. The potential is very good
for a strong move on Friday as opposed to a sideways
consolidation day. The more the press plays the official
doubt about the Al Qaeda letter the more it will be seen
as somebody trying to shift blame and a non event. The
markets are VERY oversold. -507 points for the Dow in
three days is completely out of character for the current
economic conditions.

The two options I see for Friday look like this. Depending
on the terror news coming out overnight we could see another
day of losses as weekend event risk looms large on investors
minds. One more strong decline could take the Dow closer to
10000 and the Nasdaq to 1900. Both of these levels are very
strong support. While this is a possibility I think it
would take some strong news from overseas to push us over
the edge.

The other option would be a rebound based on the lack of
any new negative news and the very oversold conditions.
While I would like to think this was the direction we will
go I have to be realistic. I thought today would be a
rebound day but the terror news killed that process after
lunch. Investors have to be thinking bargain hunting after
the drop on no real change in economics. It was just time
to rest. Once this weeks drop begin to accelerate it took
on a life of its own as they sometimes do and rapidly
overshot the expected targets. Just as the bulls headed
back into the market the terror news hit them in the face.
If you are thinking bargain hunting tonight then you are
also thinking about the weekend. Is there risk or not?
I vote no because people are more concentrated on work
days and make better terror targets. However my vote does
not count. This fear of weekend event risk could keep
traders from bargain shopping until Monday. This suggests
any rebound on Friday could be muted.

To get more specific I would expect a potential dip at
the open on any overseas news. I would expect the dip to
be bought depending on the severity of the news. Midday
could be flat as traders weigh their weekend risk. The
close could be interesting. Traders wanting to finish
dumping stocks to avoid the weekend and start with a
clean slate on Monday could be countered by strong short
covering from those wanting to lock in profits from the
big drop. Never a dull moment and never a clear answer.
Personally I would spend Friday looking for bargains and
wait for signs of strength on Monday to go buy them. Cash
is a position.

A week ago I was lamenting the fact we were trapped in a
trading range with no material movement. The first chart
below was one I showed last Thursday. Wish we were still
home on the range.

Dow Chart - 45 min


Dow Chart - 45 min



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



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

It takes a village

In her book "It Takes a Village," Senator Hillary Rodham Clinton
discussed her thoughts on parenthood, and how children develop
and what they need to succeed are inextricably entwined with the
society in which they live and how well it sustains and supports
its families and individuals.

Hold on.... there's a point to be made.

Stocks are like children.  When things get out of hand, they need
to be corrected.  Right now, there's a nice correction taking
place, largely in the form of profit taking, where yesterday, and
again today, there were few willing buyers ready to step up to
the plate.

Surround a good kid with a bunch of "bad apples," as my mom used
to day, and chances are that kid is going to take on some, if not
many of the characteristics of the bad apples.

"Jeffrey!"  "I don't want you hanging around Rodney, as he's
always getting into trouble."  Mom always called me Jeffrey
instead of Jeff when she wanted to make a point.

Now I have to laugh.  I've never read Senator Clinton's writings,
but there are some individual stocks I feel should be trading
higher than they are today, which in fact traded 52-week highs in
recent sessions, where the bullish enthusiasm for those stocks is
simply being dampened by weakness in other stocks, that make up
the various sectors and indices we may be trying to trade.

Take yesterday's trade in Sun Communities (NYSE:SUI) $40.59
-0.39%, where at mid-session broke to a new 52-week high and
traded $42.00, and by session's end, closed at $40.75.

Where in the he@@ was the village to sustain and support the
stock's gains to my swing trade bullish target of $42.40?

Yesterday, Procter & Gamble (NYSE:PG) $103.95 -1.49% jumped to a
four-year high, but gave back the bulk of those gains in today's
session.  Where in the he@@ was the village to sustain and
support the stock's gains in today's trade?

On Friday, Maytag Corporation (NYSE:MYG) $28.44 -1.62% traded a
new 52-week high and really broke out of a nice 7-month base, but
has slipped back into its base.  Where in the he@@ is the village
to sustain and support the break out of the base?

OK, so that's three examples of stocks showing relative strength
versus the MARKET, or perhaps the VILLAGE, and while I believe,
based on observation, that these types of stronger stocks will be
higher months from now, the current trade I'm observing, has the
VILLAGE looking like a ghost town, where buyers are few.

I'm not just talking about an observation from a hilltop, where
you might think I'm looking down on a village and not seeing very
many people walking around.  No.  I'm talking about walking into
the village, looking inside the huts, and not finding much
bullish enthusiasm, as internals, especially the bullish %, begin
to show more and more point and figure sell signals in recent
sessions.

Take a look at this village we call the Dow Industrials ($INDU)
10,128.38 -1.63%, which was today's second-biggest percentage
loser among the major indices.  Don't just look at today's
percentage gain/loss, but the 5-day and 20-day percentage change,
similar to the U.S. Market Watch from last night's Index Trader
Wrap.

Dow Industrials Components ($INDU) - Sorted by price



I received several e-mail from traders that noted today's out
performance to the downside in the Dow Industrials (INDU) and
even the NYSE Composite ($NYA.X) 6,480.55 -1.68%.  How's that for
a village, where little buying was found!

Is something wrong with Walt Disney (NYSE:DIS) $24.95 -1.96%?
After Comcast (NASDAQ:CMCSA) $29.05 -2.51% made its offer to buy
DIS "on the cheap" as some industry analysts have called it, the
CMCSA offer is starting to look better as DIS has now fallen from
a post-offer high of $28.00.  I'm not picking on DIS stock, as
the market response toward CMCSA's stock since the offer was made
has been anything bull positive.

If I were a Comcast (CMCSA) executive, I'd be strangling my
investment banker that assured me the market would respond
favorably to the offer made for Disney.

If I were a Disney executive, I shut my mouth about CMCSA having
to up its offer, for fear they pull the offer, or lower it.

I digress, but the trade between CMCSA and DIS right now is
largely controlled by arbitrageurs, where both stocks are most
likely being heavily shorted, where any bullish capital looking
to be directed toward stocks at this point is probably avoiding
DIS and CMCSA shares.

Market Snapshot / Internals - 03/11/04 Close



While CMCSA and DIS off their 52-week highs may not be the best
example of how some stocks I follow, or have made comment on in
recent months, have not found a lot of bullish follow through, I
wanted some of these comments to serve as a transition as to
today's internals and NH/NL indications.

A couple of questions were raised from CNBC's Bob Pisani's
continued comments that a source at one of Wall Street's most
respected technical analysis firms saying market internals are
still holding up, and that the current decline has been more
corrective and not all that alarming.

The questions among subscribers is "what are they seeing?"

Market Internals - 01/28/04 to 03/11/04



Since I keep some data tabulated daily, I thought we'd quickly
review some internals.  I'm limited by width and apologize if the
above table looks compressed, but here's my analysis.

I see very little bullishness in the NASDAQ.  The only thing
marginally bullish is that the NSDQ NH/NL 10-day Avg (column AF)
is still in a column of "X" at 92.2, but a reading of 92.0% would
have this indicator (we chart the 10-day Avg on a 2% box size
point and figure chart) turning back lower to "bull correction"
status.

On Monday, March 9, 2004, we noted the crossover of the 5-day
NH/NL average with the 10-day NH/NL averages, which put greater
emphasis on the actual price lows of the NASDAQ Composite (COMPX)
or NASDAQ-100 Index (NDX.X) as a support level, where if broken
could see a sharp decline.  Look at the rate of change to the
downside in the 5-day NH/NL averages the past two sessions.  This
is a rather quick loss of bullish leadership, which if anything
suggests that institutional bulls are becoming much less
aggressive with their buying, or bulls becoming more aggressive
with their profit taking, even when a stock is breaking to a new
high.

While not alarming large, we are seeing a greater number of new
lows, especially at the NASDAQ (column R), which is also a sign
that bulls aren't doing the "bottom feeding" they were, and when
a stock breaks a level 52-week low support, its becoming a case
of "sell now, and ask questions later."  Another sign that bulls
are less aggressive, or willing to take on risk.

Whether you agree or disagree, it is a generally accepted
investment philosophy that a weak stock (trading at or near a 52-
week low) is RISKIER than a strong stock (trading at or near a
52-week high) when the major market averages are or have recently
been near a 52-week high.

I also tabulated 5-day, 10-day, 20-day and 50-day averages of the
NYSE and NASDAQ advance/decline lines to try and pick up on any
type of A/D breadth strength/weakness trends.

NASDAQ's 5, 10, 20 and 50-day averages all show negative A/D
breadth.

The NYSE's 50-day average A/D breadth is still positive, but we
can see that shorter-term 5-day, 10-day and 20-day breadth is
weaker.

So what the heck IS GOING ON?

Longer-term profit taking?
Normal correction?
Economic slowing? Deflation?
Inflation?
Financial crisis on the horizon?
Dollar too strong?
Dollar too weak?
Presidential election uncertainty?
Terrorist threats?

Good gravy!  How about all of the above?

My mindset is that we're just seeing a normal corrective phase.
How long it could last I don't know.  How low it could go I don't
know.  However, I still believe that by year's end, the major
indices will see trade above the recent highs.  The reason I
think this is that I have never seen the bullish % charts stay so
overbought about the 70% level for so long, where now I simply
think we're seeing a corrective phase, where some price risk is
being reduced.

Last night I was looking at my "Beetle's Balanced Benchmark"
portfolio, looking for answers to any of the above questions.

Here's a link to a recent article in the Ask the Analyst column
from January 25th, when we reviewed the REBALANCED portfolio and
the UNBALANCED portfolio.
http://www.OptionInvestor.com/ask/ask_012504_1.asp

Let's take a quick look at both the 12/26/03 REBALANCED "Beetle's
Balanced Benchmark" and the UNBALANCED portfolio, which was
created back on December 31, 2002.

Comparison of Rebalancing (upper) vs. not Rebalancing (lower)



In PINK I make the comparison of the closing values (tonight's
prices).  Are we seeing profit taking?  We could be.  The AMEX
Gold Bugs Index ($HUI.X) is still up 53.65% from 12/31/02
benchmark, but is down 5.91% since 12/26/03 when we rebalanced in
the Ask the Analyst column.  The QQQ is still up an astounding
43.09%, and it's not far behind the gold bugs losses since
12/26/03.  Did your read this weekend's Ask the Analyst column
where we reviewed the various sector and market bullish % bell
curve?  One could certainly argue that all we're seeing is a
normal corrective phase and some reduction of risk from very high
levels of bullishness.

The fixed income portion of the "Beetle's Balanced" shows a 2.61%
gain versus the equity portion showing a 2.27% decline since the
12/26/03 rebalance.

Aha!  Economic slowing!  Flight to safety!

Not so fast.... I might think the same thing, but what has me
thinking that's NOT the case at this point, based on observation,
is that the junk bond portion (HIGH RISK BONDS with HIGH YIELD)
is that the Pacholder High Yield Fund (PHF) shows a price gain of
4.23% since 12/26/03 rebalance, and that doesn't include the
monthly interest payments it kicks off each month.  From 12/31/02
benchmark, it continues to be one of the better performing asset
classes.

I continue to monitor the PHF as a junk bond indicator.  It is
notable that the longer-term iShares 20-year (TLT) and PHF have
been the best performers since 12/26/03.  My thinking here, or
their association would be HIGHER YIELDING asset classes.
Certainly the PHF, or junk bond asset class carries a greater
degree of RISK, but also a much higher YIELD than a basket of
longer-term Treasuries, but if the MARKET sensed a great degree
of economic slowing, the junk bond asset classes should see
selling, and I'm not seeing that selling showing up at this
point.

Bullish % from 01/28/04 - All started with NDX



One can never know for sure if a decline is a normal correction,
or the MARKET smelling out some type of negative future event(s)
that would then have everything becoming "crystal clear."

If you read each morning's bullish percent updates, you're eyes
may have been popping out of your head when all of a sudden
you've started to see a greater number of stocks showing
reversing lower point and figure sell signals being generated.

The numbers in red are where a bullish percent chart of the
respective index turned lower into a column of "O," while the
green numbers would still show that bullish % chart still in a
column of "X."  You can really begin to see how the NDX showed
some internal weakening first, that then spilled over to the
NASDAQ Composite (COMPQ), that has just recent spilled over to
the SPX and INDU.

Note how "slow" the NDX bullish % declined, but how the sell
signals have started to build in a more rapid pace.  Almost as if
bulls have completely given up on the though of trying to bid for
many of the stocks in the QQQ/NDX.  Analysis right now is that we
might have seen about 1/2 the bullish risk now removed from the
NDX/QQQ.  This last comment should NOT be construed as "the
NDX/QQQ decline is 1/2 of the way completed" but serves as an
observation that the inherent bullish RISK has been greatly
reduced in recent weeks.

However, since PRICE does matter most, and since the QQQ closed
BELOW its MONTHLY S2 of $35.06, I need some kind of level to
associate with further downside risk.

Here's what I'm going to do.  Since the NASDAQ-100 Bullish %
($BPNDX) was at 50% last night, I'm going to take a retracement
from the QQQ close at 50% retracement, as if that would represent
50% of the bullish risk now having been removed from the QQQ.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals



This is not a conventional use of retracement at all, but may
help give some further assessment toward further downside, as the
major indices are all below their MONTHLY S2s and WEEKLY S2s.  I
notice that tomorrow's DAILY S2 of $34.34 might tie in with the
above retracement, where yesterday, the above retracement may
also tie to the $36.00 resistance found, as well as next week's
option expiration "max pain" of $36.

I have had a great deal of difficulty getting bar charts tonight,
and only got my data feed late in the evening to show the QQQ
chart.

Here's tomorrow's Pivot Matrix, where at this point only the
SPY's MONTHLY S2, the SOX.X MONTHLY S2 and BIX.X MONTHLY S2
offers any type of support for institutional buying.  These and
the DAILY S1 and S2 levels.

Pivot Analysis Matrix -



Traders in the Market Monitor may have gotten a good bearish
trade in the QQQ late today.  I profiled a QQQ day trade short
just as the BIX.X approached its session low and WEEKLY S2, with
the thought that if the BIX.X gave up that level of support, it
could then trigger some broader market selling with downside
BIX.X risk to MONTHLY S1 or MONTHLY S2.  That's almost exactly
what happened as the QQQ fell to today's (Thursday's) DAILY S1.

I've marked the SPX WEEKLY S2 and DAILY R2 as correlative, and I
would certainly assess that as an upside bounce level if a bear
were thinking of backing up the truck with a big short/put
position right now.

Do NOT underestimate next week's quarterly expiration.  I would
only use that even to understand and PLAN for the possibility of
extreme volatility.

Jeff Bailey


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

Running for the 200-dma
- J. Brown

Investor sentiment has turned sour pretty quickly this week.  The
terrorist bombings in Spain this morning have created an entire
new set of concerns that has traders running for the door to
capture profits before they're gone.  The Industrials appear
headed for a test of support at the 10,000 level, the NASDAQ
toward 1900 and the S&P 500 toward the 1100 mark.  Odds are that
at these round-number psychological levels we'll see a slow down
in the sell-off and give the indices a chance for an oversold
bounce.

This week's declines have sent several sectors careening through
support and almost everything appears headed for its simple 200-
dma.  One of the leaders in this sell-off is the Dow Transports,
which performed a beautiful failed rally under the 2850 mark and
closed under the 2800 level.  Its 200-dma isn't far away so the
Transports could find support near 2740.

Tech sectors like the GHA hardware index, the GSO software index,
the INX Internet index and the SOX semiconductor index are all
falling steadily toward their 200-dma's.  The DDX disk drive
index is already under its 200-dma while the NWX networking index
still has plenty of room left to fall.

The financial sector, which had been a bulwark of strength for
the markets, has finally succumbed to profit taking.  Both the
BKX banking, BIX banking and XBD broker-dealer indices have
fallen below their simple 50-dma's. Joining them in their flight
below the 50-dma is the IUX insurance index, which appears to
have painted a double-top in February and March.

One of the worst performers this week is the DRG drug index,
which has plummeted from the 340 level to its 200-dma near 325
(that's a big move for the DRG) in just four days.  So much for
investors returning to traditional defensive plays like drug
stocks.

One might have expected the defense sector to trade higher today
on the bombing news but not so.  The DFI is following the market
down four days in a row. Both General Dynamics and Northrop
Grumman have turned in very weak performances this month.  Of
course airline stocks took the brunt of the impact from the
terrorist event and dropped 3.41% on top of this week's earlier
losses.

The market internals have been very bearish with massive amounts
of decliners over advancers.  Today follows yesterday's numbers
with losers outnumbering winners 3-to-1 on both exchanges.  Down
volume has been excessive the last couple of days with down
volume 3-to-1 and even 6-to-1 (like today on the NYSE).  Total
volume was pretty heavy at more than 2.2 billion on each
exchange.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  7416
Current     : 10128

Moving Averages:
(Simple)

 10-dma: 10504
 50-dma: 10551
200-dma:  9753



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  760
Current     : 1106

Moving Averages:
(Simple)

 10-dma: 1143
 50-dma: 1137
200-dma: 1049



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  946
Current     : 1402

Moving Averages:
(Simple)

 10-dma: 1455
 50-dma: 1493
200-dma: 1371



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

Volatility indices continue to soar for the second day in a row
suggesting this correction is "for real" this time.  They've all
broken their descending trendline of lower highs.

CBOE Market Volatility Index (VIX) = 20.67 +2.00
CBOE Mkt Volatility old VIX  (VXO) = 21.71 +2.91
Nasdaq Volatility Index (VXN)      = 26.58 +0.53

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.20        911,050     1,097,093
Equity Only    0.96        675,246       645,835
OEX            1.14         63,747        72.514
QQQ            5.88         38,151       224,452


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

Bullish Percent Data

           Current   Change   Status
NYSE          73.7    - 2     Bull Confirmed
NASDAQ-100    43.0    - 8     Bear Confirmed
Dow Indust.   80.0    - 6     Bull Correction
S&P 500       79.6    - 5     Bull Correction
S&P 100       84.0    - 3     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: 2.11
10-dma: 1.57
21-dma: 1.29
55-dma: 1.09


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     678       829
Decliners    2173      2233

New Highs      55        42
New Lows       14        19

Up Volume    312M      554M
Down Vol.   1984M     1562M

Total Vol.  2324M     2214M
M = millions


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

Commitments Of Traders Report: 03/02/04

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

In spite of a decrease in long positions by Commercial traders
they still remain relatively neutral on the large S&P contracts.
Small traders remain steadfastly bullish.


Commercials   Long      Short      Net     % Of OI
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%
03/02/04      411,932   418,936    (7,004)   (0.1%)

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
02/10/04      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%
03/02/04      148,383    84,135    64,248    27.6%

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


E-MINI S&P 500

Commercials did put some money to use this last week and we
see an increase in long positions but they remain net bearish.
In contrast small traders reduced their longs and upped their
shorts but remain net bullish.


Commercials   Long      Short      Net     % Of OI
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%)
03/02/04      344,805   395,112    (50,307)  ( 6.8%)

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
02/10/04     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%
03/02/04     119,382     67,453    51,929    27.8%

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


NASDAQ-100

Not much change here in Commercial traders' positions.
and the same can be said for the small traders.


Commercials   Long      Short      Net     % of OI
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%
03/02/04       49,959     41,059     8,900    9.8%

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
02/10/04        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%
03/02/04       11,605     7,128     4,477    23.9%

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

Commercial traders remain asleep in the Dow futures with
almost zero change and small traders are following suit.


Commercials   Long      Short      Net     % of OI
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%
03/02/04       27,594    14,166   13,428      32.2%

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
02/10/04        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%)
03/02/04        6,898    15,874   (8,976)   (39.4%)

Most bearish reading of the year: (10,136) - 12/16/03
Most bullish reading of the year:   8,523  -  8/26/03

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


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The Option Investor Newsletter                 Thursday 03-11-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AHC, CDWC, MHK, QCOM, SLB
Dropped Puts: CTSH
Call Play Updates: AET, ATH, CFC, EBAY, RNR
New Calls Plays: None
Put Play Updates: CHIR, MMM, UTX
New Put Plays: ETN, IVGN


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

Amerada Hess Corp. - AHC - cls: 63.91 chng: -0.88 stop: 64.00

After holding for more than a week, AHC finally broke below the
$64 support level, as even the Oil Service stocks succumbed to
the broad-based selling pressure.  Selling volume increased to
well above the daily average and despite a strong midday rebound
from the lows, AHC was unable to reclaim the $64 level by the
close.  This was a good play for us and we still managed to
harvest a respectable gain.  With the overall uptrend still
intact, we'll keep our eye on the stock for another opportunity
to play the upside once this bout of profit taking has run its
course.

Picked on February 10th at   $59.53
Change since picked:          +4.38
Earnings Date               1/28/04 (confirmed)
Average Daily Volume =        930 K
Chart =


---

CDW Corp. - CDWC - close: 68.09 change: -1.34 stop: 67.00

That was unpleasant!  Rather than holding support in the $70-71
area, CDWC got pummeled yesterday with the rest of the market,
falling to critical support at $69, which needed to hold if there
was any hope for a bullish move.  Needless to say, with the
strong selling in the overall market on Thursday, support was
broken and CDWC fell almost to its 50-dma on another day of heavy
selling, ending at its low for the day.  Any hope of a rebound
from support has now faded and it appears the 50-dma will be
tested and possibly broken tomorrow.  Even if that level holds as
support, there's been enough damage done to the chart that it
doesn't make sense to keep the play active.  We're dropping
coverage tonight and suggesting that any rebound back towards the
$70 level should be used to exit the play at a more favorable
level.

Picked on March 2nd at       $72.43
Change since picked:          -4.34
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     1.25 mln
Chart =


---

Mohawk Industries - MHK - cls: 80.87 chng: -1.13 stop: 79.50

The selling in the broad market has been too much for the bulls
in any sector and despite minimal losses in the Housing sector,
our MHK play has been taking it on the chin for the past 3 days.
Yesterday's action brought the stock right down to the short-term
rising trendline near $82.  Buyers failed miserably to support
the stock at that level and MHK fell through this morning,
continuing to fall throughout the session on solid volume.  While
our stop at $79.50 hasn't yet been threatened, with the break of
the short-term trend and selling volume on the rise, prospects
for a significant rally over the near term are grim.  Rather than
hold out for a rebound into the weekend, we're just going to cut
our losses tonight.  Any rebound tomorrow should be used to
effect a better exit point.  It should not be viewed as an entry
point.

Picked on March 4th at       $84.53
Change since picked:          -3.66
Earnings Date               2/05/04 (confirmed)
Average Daily Volume =        342 K
Chart =


---

Qualcomm, Inc. - QCOM - cls: 61.78 chng: -1.72 stop: 62.00

Holding up better than most stocks during the bout of selling
that has enveloped the entire market, QCOM finally succumbed to
the bears' assault today, breaking its short-term ascending
trendline and violating our $62 stop in the progress.  With
bearish Stochastics divergence now clearly in place on the daily
chart, it appears that we had our stop set in the right place.
It would have been nice to ride the stock up to our $67 target,
but unfortunately that wasn't in the cards, so we'll have to
settle for the consolation prize of a small gain on the play.
Traders that didn't exit the play today should use any rebound
early tomorrow to do so.  The bullish run appears to have come to
an end, at least for now.

Picked on February 17th at   $59.55
Change since picked:          +2.23
Earnings Date               1/21/04 (confirmed)
Average Daily Volume =     8.51 mln
Chart =


---

Schlumberger Ltd - SLB - close: 62.16 change: -1.04 stop: 62.75

No sector has been immune from the broad-based selling that has
hit over the past two days and even the Oil Services sector
(OSX.X) got hit for a 1.66% decline today despite continued
strength in the price of crude oil.  The stock broke below the
bottom of its mid-February consolidation zone, triggering our
stop in the process of breaking its recent bullish trend.  It
looks like the stock is headed for a test of the 50-dma and we
definitely wouldn't want to stick around for that continued
decline.  But we'll keep our eye on the stock for another attempt
at a bullish play once the selling party subsides.  For tonight
though, SLB is a drop.

Picked on February 24th at   $64.47
Change since picked:          -2.31
Earnings Date               1/23/04 (confirmed)
Average Daily Volume =     3.74 mln
Chart =



PUTS:
*****

Cognizant Tech. - CTSH - cls: 42.90 chng: +0.66 stop: 44.00

Completing its trek down to our targeted exit zone, CTSH cracked
the $42 level this morning before bouncing sharply higher to tag
our lowered stop at $44.  Either way you look at it, this play
was closed out for a nice gain today and we're happy to make our
way to the exits.  After the past two days of heavy selling in
the broad market, there's a definite risk of a rebound tomorrow,
so if you haven't exited already, use any opening weakness in the
morning to do so.

Picked on February 19th at    $47.49
Change since picked:           -4.59
Earnings Date                2/10/04 (confirmed)
Average Daily Volume =      1.32 mln
Chart =



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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.

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

Aetna Inc. - AET - close: 79.65 change: -1.03 stop: 77.50

The market declines have done some serious technical damage to
the insurance index (IUX), which has put in a double-top and a
breakdown under the 320 level and its simple 50-dma.  The next
stop is likely to be the 310 level, which would be a 38.2%
retracement for the industry's November to February gains.  That
makes us cautious on AET and AET's close under the $80.00 level
makes us extra careful.  We do NOT suggest new bullish positions
in AET at this time.  More aggressive traders may want to
consider positions on a bounce from $78.00 but if AET doesn't
reclaim its $80.00 mark tomorrow we may close the play to keep
our losses at a minimum.  In the news AET held an institutional
investor conference today but there didn't seem to be any stock-
moving headlines come out of the meeting.

Picked on February 29 at $80.79
Change since picked:     - 1.14
Earnings Date          02/12/04 (confirmed)
Average Daily Volume:       1.2 million
Chart =


---

Anthem, Inc. - ATH - close: 86.73 change: -1.37 stop: 85.70

Insurance stocks have had a rough couple of days and the IUX
index crashed through its 50-dma ($319) on Thursday, as the
selling pressure in the broad market intensified.  With the
potential for support in the $310-315 area we could be nearing
the end of this decline, or we could see selling pressure slice
right through.  While ATH has been pressured by the weakness in
the market, the stock has held up better than many of its peers,
just barely violating its 10-dma ($87.17) today.  The key level
of support for the stock appears to be $86, which provided the
base for last week's launch over the $90 level.  With ATH ending
the day at its low of the day, conditions don't look great for
the bulls, but a rebound from above $86 could provide a decent
aggressive entry point.  That said, there is the risk that ATH
will slice right through that support and challenge the 20-dma
($85.56).  That average should be over (just barely) our $85.70
stop by tomorrow and if the bulls are able to defend support into
the weekend, conditions may turn back in our favor.  Aggressive
traders can consider new positions on a bounce from support, but
those with a more conservative approach will likely be best
served by staying on the sidelines until next week.

Picked on February 26th at   $85.37
Change since picked:          +1.36
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.43 mln
Chart =


---

Countrywide Financial - CFC - cls: 91.92 chg: -0.78 stop: 90.00

Bonds have been soaring all week and that means yields are
falling, which pushes mortgage rates lower.  That means more
business for CFC.  Unfortunately, the stock market declines have
been so strong this week that CFC has slipped backward with them.
Odds are growing that CFC might test support at its 21-dma near
$90.50 or psychological support at $90.00.  Our stop is at
$90.00, which puts us at risk for a play closure.  We really hate
to move our stops backward but more aggressive traders willing to
take the heat might want to consider adjusting theirs to $89.95
or lower.  We're going to keep ours at $90.00 and hope for the
best here.  Traders can actually be looking for a bounce from
$90.00 as a new bullish entry point.

Picked on February 24 at $91.63
Change since picked:     + 0.29
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       2.3 million
Chart =


---


eBay Inc - EBAY - close: 67.44 chg: -1.03 stop: 66.50

EBAY has actually been holding up pretty well these last four
days.  Unlike the major indices and fellow Internet giants AMZN
and YHOO shares of EBAY are still north of their simple 50-dma.
That gives us another level of support near the $67.00 level.
The bad news is that EBAY looks ready to test that support
tomorrow, especially given the velocity of the market's drop
Thursday afternoon.  This has been an incredibly tough week to
play bullish strategies and we're not encouraging new positions
in EBAY right now either.  Aggressive traders can look for a
bounce from the 50-dma but we'd suggest waiting for the stock to
reclaim the $70 level before considering new bullish positions.

Picked on March 09 at $ 70.05
Change since picked:   - 2.61
Earnings Date        04/20/04 (unconfirmed)
Average Daily Volume:     7.0 million
Chart =


---

Renaissancere Ltd - RNR - close: 53.85 chg: +0.11 stop: 52.00

RNR has always been a relative strength play for us.  First it
was a chance to play the strength in the insurance sector.  Then
when the IUX began to fall RNR continued to climb on its own.
The stock has weathered the recent turmoil very well holding at
support near $53.50 for the last three days.  Our official exit
plan is still $55.95 so this isn't the best place to consider new
positions.  If RNR does dip then traders can look for new bullish
entries on a bounce from $52.50 or higher (maybe $53.00) but do
so carefully.  The selling in the insurance sector has really
begun to pick up steam with the breakdown under its 50-dma.

Picked on February 15 at $50.83
Change since picked:     + 2.02
Earnings Date          02/03/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =



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

None


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

Chiron Corp - CHIR - close: 47.50 chg: -0.48 stop: 50.05

Slowly but surely we're seeing new lows in CHIR.  It would seem
that traders are concentrating their selling focus on stocks that
still have a lot of profit left in them, which is only natural.
CHIR is already in a down trend so the early sellers are already
out of the stock.  Fortunately, traders continue to use the
simple 10 & 21-dma's as pressure points to sell into strength.
Today's failed rally at the 10-dma looks good.

Picked on February 24 at $49.11
Change since picked:     - 1.61
Earnings Date          01/28/04 (confirmed)
Average Daily Volume:       1.7 million
Chart =


---

3M Company - MMM - close: 75.35 change: -0.65 stop: 77.00*new*

It certainly took its sweet time getting started, but once the
selling got started, MMM has declined nicely all week and is now
nearing our exit target.  When we initiated coverage, we were
looking for a break of $77 to give us bearish confirmation from
the PnF chart and that occurred yesterday, with the stock falling
all the way to $76.  Despite an attempted rebound today, MMM
couldn't buck the bearish trend in the overall market and then
declined to end the day very near its low of the day.  We were
originally targeting a drop to the $73 level at the 200-dma, but
with that average now over $74, we need to be more modest in our
expectations.  Let's revise the profit target to $74 and look to
exit the play should the 200-dma be tested on Friday.  With the
proximity of our revised exit target, it makes sense to get more
aggressive with our stop as well.  Lower stops to $77, which is
just above today's intraday high.  Either way, odds are good that
we'll be closing the play out over the weekend.

Picked on February 15th at    $79.68
Change since picked:           -4.33
Earnings Date                1/20/04 (confirmed)
Average Daily Volume =      2.78 mln
Chart =


---

United Technologies - UTX - cls: 85.63 chg: -1.47 stop: 89.51*new*

With the Dow Industrials in free-fall shares of UTX, a Dow
component, have been falling sharply as well.  Today's intraday
bounce back toward the $88 level rolled over after the news about
Al Queda supposedly claiming responsibility for today's bombing
hit the markets.  UTX is quickly approaching our short-term
target of $85.00 and some traders may want to begin planning
their exits.  Our official exit was a move toward the 200-dma
near $83.00 but the 200-dma is now up to 83.17.  We're going to
officially set our exit price at $83.65 and if UTX gives us a
sharp move lower we can close the play for a profit.  Meanwhile
we're going to lower our stop loss to $89.51.

Picked on March 09 at $ 88.75
Change since picked:   - 3.12
Earnings Date        01/20/04 (confirmed)
Average Daily Volume:     2.3 million
Chart =



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

Eaton Corp. - ETN - close: 54.82 change: -1.18 stop: 58.50

Company Description:
Eaton Corporation is a global diversified industrial manufacturer
with businesses in fluid power systems, electrical power quality,
distribution and control, automotive engine air management and
fuel economy and intelligent truck systems for fuel economy and
safety.    The principal markets for the company's Fluid Power,
Automotive and Truck segments are original equipment
manufacturers and after market customers of heavy-, medium- and
light-duty trucks, passenger cars, off-highway vehicles,
industrial equipment, and aerospace products and systems.  The
principal markets for the company's Industrial and Commercial
Controls segment are industrial, construction, commercial,
automotive and government customers.

Why we like it:
Culminating its strong upward trend with a 2-for one split in
late February, ETN made one last feeble rally attempt last
Friday, resulting in another lower high and setting the stage for
the next leg down to the bottom of the $56-62 trading range.  But
a funny thing happened on the way to another bullish entry point.
Support failed miserably, as the bullish sentiment in the overall
market evaporated in the past 2 days.  Near-term support was as
$58.50, right at the 50-dma ($58.48).  But yesterday's selling
party sent the stock plummeting through that potential support
like a hot knife through butter, resulting in a drop all the way
to the bottom of the trading range of the past 2 months.  Buyers
didn't even attempt a bounce this morning, as the stock continued
to plunge, taking out the 100-dma ($54.97) on the way to another
close at the low of the day on accelerating selling volume.
Today's action looks that much more bearish with the 10-dma
($58.21) crossing below the 50-dma, indicating that this level
should be strong resistance in the future.  The plunge of the
past two sessions paints an ominous picture on the PnF chart,
with a fresh Sell signal and a tentative bearish price target of
$48.

That target lines up pretty well with the next level of strong
support at the 200-dma (currently $49.19).  There are potential
support levels found at $54, $52.50 and $50 on the way to that
target, but based on the rapidly increasing selling volume, we're
betting that the 200-dma is what the bears have in their sights.
Following the sharp decline of the past 3 sessions, ETN is
overdue for an oversold rebound and we'll welcome it as the
precursor to an attractive entry point.  There should now be
strong resistance in the $56-57 area, as broken support becomes
resistance.  A failed rally in that area looks great for new
entries.  More aggressive traders can chase the stock lower below
today's low, but with the understanding that ETN is overdue for a
near-term bounce, possibly from the $54 area.  We'll use $49 as
our target for the play and set our stop initially at $58.50,
just over the 50-dma.

Suggested Options:
Aggressive short-term traders can use the March 55 Put, but with
March options expiring next Friday, time decay will be a problem.
Those with a more conservative approach will want to use the
April 55 put.  Aggressive traders looking for more insulation
against time decay will want to utilize the April 52 strike.  Our
preferred option is the April 55 strike, as it is currently at
the money and should provide ample time for the play to move in
our favor.

! Alert - March options expire next week!

BUY PUT MAR-55 ETN-OK OI= 659 at $1.10 SL=0.50
BUY PUT APR-55*ETN-PK OI= 113 at $2.05 SL=1.10
BUY PUT APR-52 ETN-PX OI=  74 at $1.10 SL=0.50

Annotated Chart of ETN:
Chart =



Picked on March 11th at       $54.82
Change since picked:           +0.00
Earnings Date                1/21/04 (confirmed)
Average Daily Volume =      1.14 mln
Chart =


---

Invitrogen - IVGN - close: 67.26 chg: -1.26 stop: 71.01

Company Description:
Invitrogen Corp. provides products and services that support
academic and government research institutions and pharmaceutical
and biotech companies worldwide in their efforts to improve the
human condition. The company provides essential life science
technologies for disease research, drug discovery and commercial
bio-production. Invitrogen's own research and development efforts
are focused on breakthrough innovation in all major areas of
biological discovery including functional genomics, proteomics,
bio-informatics and cell biology -- placing Invitrogen's products
in nearly every major laboratory in the world. Founded in 1987,
Invitrogen has headquarters in Carlsbad, Calif., and conducts
business in more than 70 countries around the world. The company
globally employs approximately 3,000 scientists and other
professionals. (source: company press release)

Why We Like It:
The trend changed for IVGN in mid-February.  Actually it was
February 12th, the day of its earnings report.  The stock enjoyed
a great pre-earnings run up boosted by gains in the broader
market.  IVGN beat earnings by 2 cents and announced a debt
offering of $450 million in convertible notes due 2024 to payoff
their notes due in 2007.  Something didn't sit well with
investors.  It was either the normal post-earnings depression or
the debt sale or something else but shares of IVGN couldn't turn
around.  There was a brief bounce at its simple 50-dma but the
bounce was rather flat.  In the last four sessions we've seen
IVGN break support at its simple 100-dma and the psychological
and historical support at $70.00 on better than average volume.

Considering the stock's run from March of last year there is
still plenty of profit on the table and IVGN looks vulnerable
toward its December lows near $63.00 and quite possibly its
simple 200-dma near $60.00.  Its P&F chart is on a sell signal
that points to the $63.00 level so we'll make that our initial
target.  We'll start the play with a stop loss at $71.01 but more
conservative traders can probably use a tighter stop just north
of $70.  We would open positions at current levels but failed
rallies under $69.50 will also work.

Suggested Options:
We would suggest the April of May puts.  Our favorite would be
the April 70's.

BUY PUT APR 70*IUV-PN OI= 164 at $5.10 SL=3.25
BUY PUT APR 65 IUV-PM OI= 376 at $2.60 SL=1.35
BUY PUT APR 60 IUV-PL OI=  60 at $1.15 SL=0.65
BUY PUT MAY 70 IUV-QN OI=1046 at $6.30 SL=4.15
BUY PUT MAY 65 IUV-QM OI= 730 at $3.80 SL=1.65

Annotated Charts:
Chart =



Picked on March 11 at $ 67.26
Change since picked:   - 0.00
Earnings Date        02/12/04 (confirmed)
Average Daily Volume:     910 thousand
Chart =



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The Option Investor Newsletter                 Thursday 03-11-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Pulling back, Testing & Breaking Support
Option Spreads:  There’s Good News & There’s Bad News
Traders Corner: Designing The System


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

Pulling back, Testing & Breaking Support

___________________________________________________________________

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.
___________________________________________________________________


Phelps Dodge - PD - close: 78.80 change: +0.02

WHAT TO WATCH:  Earlier in the session on Thursday shares of PD
were looking pretty bullish with strong gains following a 4%
rally in the price of copper and positive comments from Morgan
Stanley.  Unfortunately, the rally in PD faded as the sell-off in
the broader markets gained speed.  Today marks the second close
in a row under the $80 level and its 50-dma.  Bearish traders
might speculate on a drop toward the 100-dma near $71.00 with a
tight stop (maybe today's high) while bulls can look for a
breakout above today's high at 81.76. Volume was twice the norm
on Thursday's move.

Chart=


---

Zimmer Holdings - ZMH - close: 76.20 change: -2.00

WHAT TO WATCH:  ZMH recently broke out to new all-time highs
above the $80 level of resistance but this week's market-wide
sell-off has brought it back toward support.  ZMH closed below
its simple 40-dma but managed to hold minor support at $76.00.
We would watch the 50-dma near $75.50 for direction.  Bears can
short a breakdown while bulls can buy the bounce.

Chart=


---

Federated Dept. Stores - FD - close: 50.42 change: -0.95

WHAT TO WATCH:  FD had been one of the market's and retail sector
leaders hitting new multi-year highs in late February and early
March.  Unfortunately, most of those gains are gone as stocks
headed south this week.  FD is now resting just above round-
number, psychological and historical support at $50.00
underpinned by technical support by its 50-dma.  Technicals are
obviously bearish given the recent drop but bulls can hope for a
bounce while bears will be hoping for a breakdown!

Chart=


---

Ashland Inc - ASH - close: 47.00 change: -0.87

WHAT TO WATCH:  ASH has been a very steady performer for
investors over the past several months and has been able to
maintain its gains in the face of broader market consolidation
and weakness.  The strength in ASH is finally being challenged
with its losses starting to pick up speed in just the last two
sessions on rising volume.  Fortunately for shareholders ASH
still has technical support at its 40 & 50-dma's as well as
historical and round-number support at $45.00.  Bulls can look
for a bounce from either.  Bears might want to wait for ASH to
break the $45 level to avoid being caught in a trap.

Chart=



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

HRB $52.58 -1.18 - Normally one might think that tax time is a
bullish time of year for H&R Block.  Not so this year.  The
recent rebound has failed and HRB is painting new relative lows.
The next stop looks like $50.00.

RKY $66.52 +1.01 - low carb dieters can now enjoy a new beer as
the founder of Coors comes out with Aspen Edge.  The bounce from
$65.00 might be an entry point for bulls.

PCAR $50.00 -0.74 - PCAR is trading back towards its historical
support near $49.00 from September and November last year.  A
breakdown at $49 could lead to a test near $44 or lower.

AAPL $27.15 -0.53 - AAPL's recent strength has been amazing.  The
stock broke out to new three-year highs this week and appears
unaffected by the market's sell-off.

CCL $42.46 -1.95 - Cruise liner CCL got hammered today fueled by
terrorist fears.  The breakdown at its 50-dma could lead to a
test of $40.00 or even its 200-dma near $36.00.


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Option Spread Strategies
************************

There’s Good News & There’s Bad News
By Mike Parnos, Investing With Attitude

Don’t get excited. I lied about the good news.  The market is
playing with our minds and our money.   Thus far, our Couch Potato
Trading Institute portfolio has two casualties.  The other two are
hanging on by their short and curlies.

Well, maybe there is a silver lining.  With the market plummeting,
some of the volatility has returned to the market.  That’s good,
because we’re premium sellers.  However, it’s no so great if we
have to bail out of trades gone bad.

It’s time to think seriously about adjusting our QQQ ITM Strangle
position.  Many astute CPTI students have already done so.   Right
now, with the QQQs at about $34.85, our March $34 calls would cost
$1.15 to buy back.  That means there is still $.30 of time value
left.  We have no idea where the QQQs are going to end up.  The
only thing we know for sure is that the $.30 of time value will
erode away by option expiration.

The April $34 calls can, as of tonight, be sold for about $1.60.
If you rolled out now, we’d be taking in a credit of $.45.  If the
QQQs didn’t change in value between now and expiration (which, I
know, isn’t realistic), we might gain $.25 in additional time
erosion of the March $34 calls.  At the same time, we might lose
$.10-.15 in the erosion of the April $34 calls.

If the market continues to pull the QQQs down toward our $34
strike price, the situation changes.  Why?  Because, even though
the intrinsic value will be disappearing, the amount of time value
will increase.  Remember, at-the-money options always have the
most premium – whether it’s March or April.

That’s not a bad thing, because, regardless of how much time value
is left in the March $34 call, it will be gone by expiration.
Then, if the QQQs are at, or near, $34, you might take in $.75 for
the rollout to the April $34 calls.

The same concept holds true for those CPTI students who have the
$35 calls.  The closer you are to your sold strike (calls or
puts), the more premium you can take in.  The further you are in-
the-money, the less premium that will be available.

For the moment, we’ll roll out the $37 puts and take the $.25.
We’ll wait on rolling out the March $34 calls to see where the
market takes us.

In the QQQ Strangle email question below, I go over a few
alternatives.  Keep in mind that the email arrived a few days ago
and the prices are different now.  The reasoning behind the
potential adjustments is still valid.

NOTE:  We also made an adjustment to the Zero Plus Strategy.  See
the details below.
_____________________________________________________________

Hi Mike,
I’m in the QQQ ITM Strangle with the $38 calls and $37 puts.  I
just bought back my EOY March $38 QQQ calls for $.05, but have
not sold the April  36 calls at $.95 - $1.00 yet.  My thinking is
that there is a good chance that Comp support at 1,990 will hold
as well as Dow 10,400.  If we get a QQQ bounce into next week,
option expiration week, then I may well have a chance to buy back
the March QQQ puts cheaper before I roll them to April.  That may
also yield the opportunity to roll them to April strike prices
that are more in the middle of the 33 - 43 Jan 05 range.

If I rolled the calls now to $36, and the puts moved up to over
$36, at what strike would you sell the puts?  36?  I'm trying to
learn fast, but don't have the experience base yet for the rolling
process?   Thanks for your patience, Coach.  I need the help. --
William

Hi William,
Since you already bought back the Mar. $38 calls, you have a
choice to make.  Right now (when this email was received) you
could get $.95 for the April $36 call.  In a week and a half, that
$.95 may erode to $.75 (with all else being equal).

If you think the market will bounce let's say $1.00 in the next
week.  Then, you might get $.85 for the $37 calls -- IF it
bounces.

You don't have to do the puts now, even though it’s in the money
and almost all of the time value is gone.  If the QQQs bounce up,
you may be able to get more for your $37 puts.

Look at the puts now.  With the QQQs trading at $35.73, the Mar.
$37 puts would cost $1.40 to buy back.  That would mean you're
only paying $.17 in time value -- for a week and a half.  If you
rolled out now to the April $37 puts, you could sell them for
$1.80.  You would pocket the $.40 difference.

If you wait, and the stock doesn't move, the $.17 of time value in
the Mar. $37 puts will not likely go down until very close to
expiration Friday.  The $.57 of time value in the April $37 puts
will likely go down about $.10.

As you know, it's hard to guess what the market is going to do.  A
lot of this is just a matter of personal preference.  There are no
set rules.  If you rolled out now, you'd take in a total of about
$1.35 and have sold the April $36 calls and $37 puts.  Ideally,
you'd like to have sold the $36 puts and $37 calls.  That makes it
a little easier to roll out for the May cycle.  But, in the
markets, we don't always get what we want.

If you anticipate a bounce, you've essentially become a
directional trader.  If you're comfortable with that, fine.  Your
risk is that some premium may erode away while you're waiting for
the move to happen.
______________________________________________________________

MARCH CPTI POSITIONS

Position #1 – OEX (S&P 100 Index) Iron Condor – 544.16
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 – 568.74
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 - $140.22
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.  Our range was
violated and we closed the position for $2,300.  We took in
$1,800.  Result:  $500 loss.

Position #4 – BBH (Biotech Index) - Siamese Condor - $144.10
We sold 10 BBH March $145 calls and sell 10 BBH March $145 puts
for a credit of about $6.95.  Then we bought 10 BBH March $160
calls and buy 10 BBH March $130 puts for a debit of about $.70.
The total net credit was $6.25 ($6,250).  Our profit (safety)
range was $138.75 to $151.25.  These were also our bailout points.
The closer BBH finishes to $145, the more money we will make.  We
closed the position for a loss of $1.15 ($1,150).
______________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $34.87
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 – 544.16
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.

Adjustment:  Buy back the OEX March 585 call for $.10 and sell the
March 560 call for $1.35.  A credit of $1.25 x 300 = $375.00.
_____________________________________________________________

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

Designing The System
by Mark Phillips
mphillips@OptionInvestor.com

We've spent the past few weeks dancing around the issue of
building an automated trading system and just how one goes about
it.  While we could have jumped right into the process of looking
at charts and indicators and trying to develop trading rules, I
purposely avoided it because I wanted to focus everyone's
attention on the issues that I think are more important.  Namely,
that we have to have reasonable expectations, be able to measure
the results coming out of the potential system and determine
whether they meet our trading goals and more importantly, whether
they are likely to be sustainable over the course of time.

I think if we spent the next 12-14 weeks on this topic, we might
be able to cover all the different nuances involved in the process
and build a candidate system that might be viable.  Unfortunately,
we'd each have a different view, a different timeframe, prefer to
trade a different set of symbols, or any number of variances.
That's why when we started out, I said I didn't want to build a
system for you.  I want to guide you down the path of system
development so that you're equipped to create a system, test it
out and put it into practice all on your own.  Trust me when I say
that it is far more valuable to be able to create your own system,
because you'll know it well enough that you can recognize when it
isn't performing and make the necessary adjustments.  You can
never do that with a system that is not of your own creation.

Alright, enough chatter.  Let's get to the charts and see what we
can learn.  Recall that we're keeping things as simple as possible
in this discussion, so that the concepts remain clear.  Moving
average crossover systems are just about the simplest that can be
developed and we picked a couple of obvious periods to start with
-- the 50-pma and the 200-pma -- and we'll be looking at their
interaction on our first test stock (CSCO) on various timeframes.
Recall also that our goal is to generate 2-3 trades per month and
that will tie in with the timeframe we choose to trade.

Last week's assignment was for you to apply those averages on
various time-frame charts and see if there were any usable
patterns there that we can use for defining our first system
rules.  I hope you had fun with the exercise, but more importantly
how the averages interact with one another, especially as we
change timeframes.  The suggested timeframes to review were 5-,
10-, 15-, 30- and 60-minute charts.  There's nothing magical about
any of these settings -- they just happen to be among the most
common ones in use.  Part of system development would consist of
also experimenting with different timeframes.  As a clue to the
theme of an idea we'll explore next week, what would happen if we
picked chart periods that correspond to primary Fibonacci numbers?
But I digress...

Before we proceed define the basic behavior that I was expecting
to find.

1. With the 50-pma over the 200-pma, the trend is bullish, so
   we're looking to take only long trades.  With the 50-pma below
   the 200-pma, the trend is bearish and we're looking to take
   only short trades.

2. Potential bullish trades may come under any one of the
   following conditions:
     - 50-pma crosses up through the 200-pma
     - Price touches the 50-pma
     - Price touches the 200-pma

3. Potential bearish trades may come under any one of the
   following conditions:
     - 50-pma crosses down through the 200-dma
     - Price touches the 50-pma
     - Price touches the 200-pma

Remember, these are just our starting ideas for the chart
analysis.  Now it's time to dive into the charts and see if there
is any merit to the theory, if it needs to be modified, or
discarded as the first (probably of many) ideas that will be
discarded along the path to a winning system.  The first chart up
at bat is the 60-min chart.

CSCO 60-Minute Chart



With the 50-dma solidly above the 200-dma at the far left of the
chart, clearly we're starting out with a bullish bias, using each
touch of the 50-dma as a potential long entry point.  After quite
a bit of chopping around the average, price takes off, eventually
resulting in a very nice bullish move.  Then conditions change,
producing a couple of losses as price breaks down under the 50-dma
and then hits the 200-dma.  That initial touch of the 200-dma is
another potential long entry point, but with the gap down under
$25, , we get a dross of the 50-dma below the 200-dma, resulting
in a reversal to a short position and a short bias.  Then all the
way into the far right of the chart, we are using each subsequent
touch of the 50-dma as continuation short entries.

Quite honestly, I'm not particularly wild about the results here,
but with the appropriate definition of profit targets and initial
stops, we could probably get a workable system defined.  But maybe
there's a better solution to be found on the shorter timeframes.

CSCO 30-Minute Chart



Unfortunately, due to space constraints, we can't look at the same
size data sample on the 30-minute chart.  So what we're looking at
is the early December to mid-January period, where we get an
initial bullish bias with the crossover of the moving averages in
late November and never see a reversal, all the way into the mid-
January highs.  Each test of the 50-dma provided viable entries
into the overall bullish trend.  Needless to say, there were
plenty of opportunities to get aboard for the ramp higher into
late January.  I actually like the performance of the 30-minute
chart better than that of the hourly chart, and it's hard not to
appreciate the added responsiveness of the shorter timeframe.  How
about if we slide down one more notch on the time scale?

CSCO 15-Minute Chart
AC


Alright, there's just no way to put a pretty face on that chart.
With 6 crosses of the moving averages, clearly our trend bias has
the ability to shift far too easily and the 15-minute chart is too
short for our purposes, at least with our first test stock.

Looked at subjectively, I'd have to say that the 30-minute chart
is the optimal timeframe for using these particular moving
averages.  There may be a better choice, like 22 minutes, but
we're sticking with the round numbers for our discussion.  So
what's the next step?  Well we've now made some observations as to
what timeframe seems to give the most reliable price action around
the specified averages.  Now we need to find out if our short-term
observations stand up to the test of time.  That means either a
ridiculously large amount of time dragging charts back and forth
and scribbling notes, or it's time to sit down at the programming
terminal and let the computer do the tedious work for us.

Of course, we'll have to specify parameters for profit targets for
each trade, as well as initial and trailed stops.  Everything must
be defined in advance as the computer can only do what we tell it
to.  Once the model is programmed, we want to have it crunch
through at least 12 months worth of intraday data and give us the
cold hard numbers.  Does it make money or not?  How much?  And the
all important issue of what is the maximum drawdown over that
period of time.

If I'd hazard a guess, I'd say this system would end up a loser no
matter how we jockey the profit target and stop management
settings.  I mean, this is a pretty simple approach and if it was
that good, someone else would have stumbled across it long ago.
That isn't to say that a moving average crossover system couldn't
be VERY profitable, it's just unlikely to be this one.

So how do we find out?  Trial and error, my friends.  We've
already got the initial test system built in the computer and now
it's just a matter of tweaking parameters.  We can change the
periods of each of the moving averages, maybe add a third or
fourth for added filtering and possibly even consider exponential
averages instead of simple.  Then of course, there's the added
nuance of perhaps shifting one of the averages forward or backward
in time, each of which will change the nature of the averages
interactions with price.

As you can see, even on something as simple as a moving average
crossover system, when it comes to the process of optimization,
the possibilities are just about endless.  First we narrow down
the timeframe, then we start picking moving averages that seem to
act well with regard to price and the way we're interpreting those
averages.  It's a delicate balance between looking at the charts
with different averages applied, then picking what we think we
like, making the appropriate changes in the system test in the
computer and letting it filter out the winning ideas from those
that should be discarded.

Once we've finally settled on something we think works for a
single stock, then it's time to expand the universe and run our
other test stocks through the same system.  If we get acceptable
(i.e. a positive equity curve) over a period of a year or more,
and also across a basket of stocks, then we'll know that we have
really come up with something worth paying attention to.

If there's any interest, I'm more than willing to carry this
exercise forward in the weeks ahead, but I don't want to keep
harping on the same topic if you're bored with it.  So let me know
what you want.  Who knows, if we keep marching down this path, we
just might get lucky and come up with something that does provide
the basis for a viable automated trading system.  Now wouldn't
that be a nice surprise?

Have a great weekend!

-Mark


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