Option Investor

Daily Newsletter, Thursday, 03/18/2004

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The Option Investor Newsletter                Thursday 03-18-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Al Qaeda Expiration
Futures Markets: See Note
Index Trader Wrap: Intra-day swings with a new twist
Market Sentiment: Not a good sign

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      03-18-2004           High     Low     Volume   Adv/Dcl
DJIA    10295.78 -  4.50 10328.82 10214.15 1.57 bln 1389/1724
NASDAQ   1962.44 - 14.30  1972.31  1947.31 1.66 bln 1431/1787
S&P 100   550.69 -  0.79   552.44   546.32   Totals 2820/3511
S&P 500  1122.31 -  1.44  1125.50  1113.25
W5000   10960.56 - 20.30 10990.90 10875.18
SOX       480.66 -  6.40   578.57   569.23
RUS 2000  574.55 -  4.02   578.57   569.23
DJ TRANS 2830.92 - 16.70  2850.50  2813.10
VIX        18.53 +  0.42    19.23    18.35
VXO (VIX-O)18.62 +  0.48    19.65    18.18
VXN        24.58 -  0.17    25.36    24.32
Total Volume 3,569M
Total UpVol  1,222M
Total DnVol  2,277M
Total Adv  2928
Total Dcl  4004
52wk Highs  255
52wk Lows    33
NasTRIN    1.72
TRIN       1.15
PUT/CALL   0.80

Al Qaeda Expiration

News that the number two man in the Al Qaeda organization
may expire along with March options lifted the markets off
their lows and back to the highs for the week. The rumors
were flying fast and the market makers earned their money
today keeping the SPX under 1125 and guaranteeing the most
SPX options would expire worthless.

Dow Chart - 45 min

Nasdaq Chart - Daily

SPX Chart - Daily

Pakistan announced they were in a major battle with Al Qaeda
and the tribesmen supporting them and they thought they had
a high value target surrounded. The rumors were flying as
to what high value target it might be and the latest word
was Ayman al-Zawahiri, the number two leader was trapped.
The fight was centered around a very heavily fortified area
that the military said had been built to withstand a military
attack. The military said over 200 heavily armed defenders
were surrounded and they were going to bring in air power
at dawn Friday to finish them off. It may be some time
before we really know who is under the rubble.

Fortunately the news came just in time to prevent a market
melt down as the indexes were accelerating into a decline
just after 12:00. The economic news had been less than
encouraging with the exception of Jobless Claims. New claims
for last week fell to 336,000 and the lowest level in three
years. Also encouraging is the week of the month this report
represents. Last week was the survey week for the monthly
Jobs Report and that suggests we could have an improved
jobs number for March.

The PPI for January, yes we finally got it, showed prices
jumped twice the amount expected at +0.6% but the majority
of the increase was in energy. Gasoline prices were up +14%
in January. This was old news and traders breathed a sigh
of relief that the long awaited report, delayed due to a
new method of accounting, was not substantially worse.
Prices rose on capital equipment, vehicles, construction
equipment and aircraft due to higher demand. Nobody is
going to complain about that. The only category with lower
prices was foodstuffs brought on by the Mad Cow panic in

The Conference Board Leading Indicators was unchanged for
February and less than expected. The lower than expected
number was caused by a drop in sentiment. This information
is produced from previously announced components so the
market tends to ignore it.

The biggest negative for the day was the Philly Fed Survey
which dropped to 24.2 for March from 32.4 in February. This
was not exciting news. While it still shows an increasing
level of manufacturing there was a substantial drop in
several areas. New Orders fell to 21.9 from 27.8 and
suggests a slowing in the buying process. Inventories
fell back into negative territory at -12.8 from +0.8 last
month. Unfilled orders rose to 8.8 from 4.4 and delivery
times rose to 19.0 from 7.2. This is confusing as you
would think a drop off in business would speed up the
delivery process. Because of a shortage of inventories
in the entire system it could suggest a shortage of new
components and raw materials. Adding to this theory was
a drop in the average workweek to 17.9 from 23.6 and
a minor drop in employees. Prices paid jumped +10 points
which also suggests higher demand for raw materials.
The biggest component drop was in the six-month outlook
which fell to 36.7 from 51.4. That is a -14 point drop!
This report was a shock for traders but it was still a
positive report. Only the inventory component was negative.
The still positive headline number means manufacturing
activity is still increasing but only at a slower pace.

The last report was the FOMC minutes for the January meeting.
The minutes were fairly calm except for fears of a potential
deflationary enemy. The minutes said "In the view of many,
some modest further disinflation appeared to be the most
likely prospect." That feeling still persists in the recent
meeting announcement where they still gave the nod to a
potential deflationary scenario as having the highest risk
although the risks were "roughly equal". They were still
expecting "faster growth in employment" but so far that
has been an elusive goal. There was some concern about the
potential health of the economy in the second half of 2004
once the tax cut stimulus (refunds) ran their course. The
concern was a slowing of demand and potential problems in
the consumer area. I do not see any rate hikes any time in
the near future based on their valid concerns for lack of
robust and continued growth.

The uncertain and contradictory economics along with option
expiration produced a day that opened with a negative bias
after two days of strong gains. Traders started out taking
profits and the negative Philly Fed report accelerated that
trend. The Dow had fallen to 10214 from yesterday's 10305
close when the rumors hit the wire. Within 30 min the Dow
was back to the high of the day at 10328. Most of that was
in three candles as traders rushed to cover their shorts.
Once the burst of news was over and it was determined that
Bin Laden was probably not in the area the excitement begin
to fade with the indexes pulling back to support to await
a Pakistani update. When the 3:PM bell rang and there was
no further drops and no further news those still short
began pondering their fate if a surprise announcement hit
the wires overnight. Shorts began to cover once again and
the Dow jumped +60 points into the close.

The Nasdaq followed the same pattern as the Dow only it
never returned to yesterday's levels. 1970 remained the
current resistance level. This was frustrating to traders
because Merrill upgraded the semiconductor sector before
the open to overweight. The SOX made it to positive
territory but could not hold it and ended down -6 for the

The real challenge for the day was not the news, economics
or al Qaeda. It was option expiration week. Those who
bought the bottom on Tuesday took profits and closed those
option positions at the open and then paused to determine
direction. With the Nasdaq hovering right in the middle
of its range for the last six days it was tough to decide
what direction we were headed and everybody waited on the

This was complicated by the max pain points being at the
high end of our ranges. The SPX max pain point was 1125
and we have stopped dead on that level for two consecutive
days. When the al Qaeda spike hit at 1:15 the S&P futures
ran to exactly 1124.80 and stopped dead on huge volume.
The short covering rally at the end of the day also stopped
at 1124.80 on large volume. Market makers had a serious
desire to keep the SPX pinned under 1125 and despite the
monster news spike they managed it beautifully. Now they
have to hold their breath overnight and hope there is not
any news before tomorrows open to upset their plans.

Despite the market weakness today, regardless of the cause,
there was not any serious problem with stocks. Microsoft
was knocked for a minor loss at $24.89 after they announced
settlement talks with the EU had broken down. The EU is
set to hit MSFT with a fine in the hundreds of millions
of dollars after Microsoft refused to make certain changes
to Windows. Microsoft said it planned to appeal any ruling
in court. A court case could take years to even come to
trial and an EU order could force the Microsoft make changes
in a matter of months. The EU is demanding that Microsoft
sell a discounted version of Windows that does not contain
Media Player so that rivals like RealNetworks and Apple
have a chance to sell their products. They are also likely
to require Microsoft to make their code available so other
companies like SUNW can integrate their software into
Windows. Microsoft only lost -24 cents on the news but it
did close at a new multi month low.

We are actually seeing some bullish things shaping up for
the current quarter. We are continuing to see companies
post good earnings. Adobe earnings tonight were a prime
example. They posted earnings of 50 cents when analysts
were only expecting 40 cents. They earned a record $423
million and a +43% increase over the same quarter last
year. Shares were up +$2 in after hours.

This continued trend of better than expected earnings and
better than expected guidance, except for Intel, continues
to raise the expectations for the first quarter. We are
right in the middle of the regular warning cycle and to
date we have not had any major confessions and very few
minor ones. The quarter is shaping up to be outstanding.
The low interest rates should continue, possibly for the
rest of the year. All we need is for the economy to catch

Countering the bullish thoughts above there is a growing
crowd of analysts that are worried about the 3.7% yield
on the ten-year note. They claim this is a number that
could be telegraphing economic problems ahead that may
include another recession. Some people would complain
if you hung them with a new rope. There is also the news
making the rounds again today that Japan may quit buying
bonds to weaken the Yen. They budgeted $100 Billion for
that in the first quarter and they have already spent $45B
and have twice this week floated the trial balloon that
they were rethinking their policy. This could impact
rates, the dollar and the equity market. While everyone
agrees the economy really needs to be growing faster they
also agree it is growing and eventually it will heat up.
We still have not seen the impact of the massive flood of
income tax refunds that should be hitting mailboxes soon.
Large refunds, low interest and spring weather should
provide a boost to the economy for the second quarter.

The challenge over the next several weeks is to rebuild
the bullish sentiment in the market. We suffered a huge
sentiment blow over the last two weeks. While the drop
to date was only a garden variety profit taking dip any
further drops from here could be serious. This coming
week is going to be pivotal. We will either move higher
and begin battling to recover lost ground or we are
going to head for the next lower support level. The odds
are very good we are NOT going to just continue trading
sideways. We are clearly going to have some volatility at
the open as the index options settle and probably some
news event movement as well. The rest of the day may
expire peacefully.

Moving into next week we will not have the options weight
hanging over our head and will be free to move without
restrictions. One thing is clear, even with the news
event spike today the volume was terrible. Only 3.5B
shares traded across all markets. This is almost holiday
volume and the second consecutive day under 4B. We need
a catalyst to get things going again and I do not see
anything on the horizon. There are no material economic
reports until next Wednesday so we will be left to focus
purely on stocks. Friday may not be a stellar day to jump
into a position due to all the conflicting forces. Finding
somebody important in the Pakistan rubble could provide
the stimulus for a short term breakout but there is also
the possibility that after today much of the news has been
baked into the cake.

Enter Passively, Exit Aggressively.

Jim Brown


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


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Intra-day swings with a new twist

The major indices saw a second consecutive session of volatility,
where a delayed January report on inflation showed January
producer prices rising 0.6%, with a 4.7% jump in energy more than
offsetting a 1.4% decline in food prices.

That news set a negative tone early, and much of yesterday's
gains were erased, where in the case of broader technology,
losses were found by mid-session.

But stocks reversed from their lows, to finish back near
unchanged levels on news out of Pakistan, that Pakistani troops
believed they had surrounded a key al-Qaida target, Ayman al-
Zawahiri.  As I write tonight's Index Trader Wrap, there has been
no further clarity to these reports.

Suffice it to say, if today's economic data and this week's
Triple Witch expiration wasn't ingredient enough for a volatile
and uncertain trade, then some potentially positive news on a
geopolitical scale added a little more spice to what we've been
seeing of late.

Market Snapshot / Internals - 03/18/04 Close

A/D lines at both the NYSE and NASDAQ finished negative, but it
is notable how improved the A/D indications became when news out
of Pakistan hit the wires.  It is always difficult to measure
what it would mean if a key al-Qaida target was captured as it
relates to any economic factor, but it would certainly have some
type of positive impact on investor and consumer psychology.

Of late, I started to wonder how many Corporate CEO's might have
had a stack of IT spending, or new job hiring approval forms on
their desk, ready to sign, but with recent terrorist bombings in
Spain, and a change of that country's government, with some
citing those very terrorist attacks as reason for the change in
government, hasn't had some CEO pushing the pile of approval
forms to the side, while they await some type of clarity on
things, before increasing expenditures.

June Light, Sweet Crude Oil futures (cl04m) - Daily Intervals

Energy prices were a key reason for the rise in January's
producer prices, so I thought I'd quickly review a chart of the
June Light, Sweet Crude Oil futures (cl04m).  A quick check of
this commodity's point and figure chart hints at a potential
bullish price objective of $40.50.  OPEC has been stringent with
increasing its supply quota's, and a recovering global economy
has increased demand.  That type of equation makes for higher
prices, where Treasury Secretary John Snow said he is really
becoming concerned with the high price of energy, as it acts like
a tax that can stall spending in other parts of the economy.

Pivot Analysis Matrix -

The only thing I would say in regards to the pivot matrix, was an
observation I noted in today's market monitor, just before the
news out of Pakistan hit the wires.  I was noting that the QQQ
was edging up from its lows of the session, after just dipping
below its DAILY S2, while the other indices had edged up from
there lows of the session, after trading near their DAILY S1s.
Tracker's have DIA "Max Pain" at $105, while QQQ "Max Pain" is
$36.  The Q's certainly seem to want to trade closer to the
$35.25 level, where inflections of $0.25 either side seem to
gravitate back toward $35.25.

AMEX Gold Bugs Index ($HUI.X) - Daily Intervals

The $HUI.X was on the verge of what seemed to be a break above
its downward trend, when wouldn't you know it, the news out of
Pakistan had gold stocks backing off their best levels of the
session.  The dollar was weak today, with the U.S. Dollar Index
(dx00y) 87.64 -1.12% currently trading down 1.00 point, while
higher producer prices in January brought some thought to

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

The S&P 500 Index (SPX.X) traded within yesterday's range, where
this quarter's "Max Pain" level of 1,125 serves up resistance.
An intra-day observation would have found the SPX hitting its
session high of 1,125.50 at 03:35 PM EST, well after the news out
of Pakistan was in the market, but sellers were firm at 1,125.

In last night's Index Trader Wrap, I said I wanted to begin
monitoring the Market Volatility Index (VIX.X) 18.53 +2.31% in
coming weeks, as I made a note to myself on Monday, when the
VIX.X kissed the 21.22 level, to begin tying in some longer-term
observations with the VIX.X, and the S&P 500 Bullish % ($BPSPX).

Market Volatility Index (VIX.X) - Weekly Intervals

I've shown this chart of the VIX.X over the years, where I like
to set my retracement from 40.00 to 16.78, where I've found this
retracement, which breaks up the range in levels, to tie in
rather well with what we will see in the S&P 500 Bullish %
($BPSPX).  After trading well below the 16.78 level, the VIX.X
was able to come up at touch a level higher at 21.22, where this
can become an alert towards a shift from call buying to put
buying.  It also comes as some of the bullish % charts have
either shows weakness, like both the NASDAQ-100 Bullish %
($BPNDX) and NASDAQ Composite Bullish % ($BPCOMPQ), with some
softening showing up in the S&P 500 Bullish % ($BPSPX).

S&P 500 Bullish % ($BPSPX) - 2% box size

You could probably turn the S&P 500 Bullish % Chart ($BPSPX)
upside down, and see great similarities between it and the Market
Volatility Index (VIX.X) shown above.  However, each tell a
similar yet different story.  While internals at the S&P 500 have
been softening of late, it would currently take a reading of 72%
for this market indicator to turn "bear confirmed."

With all the quarterly expiration option action we've been
seeing, the VIX.X can be difficult to interpret, but I would have
to think that institutional hedging, and buying of puts would be
alerted to if the VIX.X moves above 21.22, especially if the S&P
500 Bullish % ($BPSPX) falls to "bear confirmed" status at such a
high level of bullish risk.

From past index trader wraps, and some focus I've been giving to
option-related activity, there certainly seems to be a lot of
interest around the SPX 1,125 level, as if it is a point of
equilibrium where there is a heck of a lot of option action
taking place, as if bulls and bears are very busy with some
hedging activities.

The SPX Bullish % ($BPSPX) tells us that while internals are
still strong, but softening, there's a lot of bullish risk that
can still be taken out of this market.  The VIX.X becomes useful
in understanding what types of premiums options are fetching,
where premiums will rise (VIX.X will rise) when premiums rise.
That is often when the demand for puts starts to increase, and
supply of STOCK begins outstripping demand.

Jeff Bailey


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Not a good sign
- J. Brown

After a volatile session the major indices closed mildly lower
with tech stocks taking the biggest lumps.  Lifting the markets
from its midday doldrums was news that Pakistani troops had
surrounded what was believed to be Al Qaeda's number two man
behind Osama.  Should they be successful in capturing or killing
him then global markets are likely to have a bullish tailwind
going into the weekend.  At least that is the general consensus.
The growing violence in Iraq as we approach the one-year
anniversary of the start of the war is still somewhat unsettling
as news channels flash pictures of flaming wreckage.

The failure to reach a settlement between software giant
Microsoft (MSFT) and the European Union helped depress the
software sector.  The EU is likely to issue a huge fine totally
several hundred million euros.

Today's weakness and inability to breakout above the simple 10-
dma in the Dow Industrials and the NASDAQ composite is not a good
sign.  I suspect that investors are still cautious and tomorrow
could be weak if we don't get any positive headlines to inspire
the markets higher.


Market Averages


52-week High: 10753
52-week Low :  7929
Current     : 10295

Moving Averages:

 10-dma: 10313
 50-dma: 10526
200-dma:  9788

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  843
Current     : 1122

Moving Averages:

 10-dma: 1125
 50-dma: 1137
200-dma: 1053

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1014
Current     : 1417

Moving Averages:

 10-dma: 1425
 50-dma: 1487
200-dma: 1377


Markets churned sideways today and the volatility indices
followed suit.

CBOE Market Volatility Index (VIX) = 18.53 +0.42
CBOE Mkt Volatility old VIX  (VXO) = 18.62 +0.48
Nasdaq Volatility Index (VXN)      = 24.58 -0.17


          Put/Call Ratio  Call Volume   Put Volume

Total          0.80        876,364       700,998
Equity Only    0.65        607,071       393,536
OEX            0.78         87,459        68,037
QQQ            3.22         30,566        98,571


Bullish Percent Data

           Current   Change   Status
NYSE          71.8    + 0     Bull Correction
NASDAQ-100    43.0    + 0     Bear Confirmed
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       77.0    + 0     Bull Correction
S&P 100       85.0    + 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: 1.17
10-dma: 1.64
21-dma: 1.35
55-dma: 1.11

Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1654      1440
Decliners    1158      1575

New Highs      63        40
New Lows       13        19

Up Volume   1178M     1144M
Down Vol.    618M      771M

Total Vol.  1833M     1960M
M = millions


Commitments Of Traders Report: 03/09/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

Commercial traders are committing new money to both long
and short positions but they are turning more and more
bearish in the large S&P contracts.  Small traders are
holding relatively steady.

Commercials   Long      Short      Net     % Of OI
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%)
03/09/04      418,394   433,237   (14,843)   (1.7%)

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
02/17/04      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%
03/09/04      155,947    88,317    67,630    27.7%

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

Wow!  We really saw some money come into the e-mini's
this week.  Commercial traders added nearly 90K new long
contracts and more than 90K new short contracts.  They
remain net bearish on the S&P.  Small traders also added
more to their positions but remain net bullish.

Commercials   Long      Short      Net     % Of OI
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%)
03/09/04      431,623   485,268    (53,645)  ( 5.9%)

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
02/17/04     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%
03/09/04     135,233     76,558    58,675    27.7%

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


Commercial traders have slowly been turning more and more
bullish on the NASDAQ 100 over the last few weeks.  As of
March 9th, they hit new extremes surpassing they're last
bullish peak dating back to June 11th, 2002.  Unfortunately,
this reading is before the steep Wednesday-Thursday sell-off
this week and before the Thursday morning terror attack in
Spain.  We'll have to wait until next week to see how
commercial traders, or "smart money", reacts to the last
few sessions.  Small traders have also turned more bullish
but they're not hitting extreme readings.

Commercials   Long      Short      Net     % of OI
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%
03/09/04       57,368     46,082    11,286   10.9%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  11,286   - 03/12/04

Small Traders  Long     Short      Net     % of OI
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%
03/09/04       15,533     8,070     7,463    31.6%

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


Commercial traders or institutions have been slowly growing
more and more bullish on the Dow over the last few weeks.
Again, this latest data is before the Wednesday-Thursday
sell-off and the Thursday terror event but it is encouraging.
In contrast small traders have turned more bearish and actually
hit a new extreme in their bearishness, surpassing last
December's readings.  This is a contrarian bullish indicator
since small traders tend to be wrong.  Yet I would hesitate
to draw too many conclusions until we see next week's data
and investor reaction to the terrorist attacks.

Commercials   Long      Short      Net     % of OI
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%
03/09/04       26,867    12,845   14,022      35.3%

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
02/17/04        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%)
03/09/04        7,053    19,159  (12,106)   (46.2%)

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03



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The Option Investor Newsletter                 Thursday 03-18-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: DHR
Call Play Updates: AET, ATH, CFC, EBAY, JNPR, LXK, RNR, TARO
New Calls Plays: DGX
Put Play Updates: CHIR, ETN, IVGN
New Put Plays: None


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




Danaher Corp. - DHR - close 92.44 change: +0.38 stop: 92.75

Sometimes a play candidate tells you right out of the gate that
you've taken the wrong side.  DHR is one such play, as it
absolutely exploded higher yesterday, actually tapping a new all-
time high (and triggering our stop) before pulling back just as
quickly and then embarking on a steady uptrend.  We were looking
for a breakdown under $87.50 to trigger the play and since that
never happened, there was obviously no temptation to enter the
play.  It appears the risk of a breakdown has completely
vaporized over the past two days, so we're dropping coverage of
DHR.  This is one of those times that our trigger performs its
intended function -- keeping us out of a play that goes against
us from the start.

Picked on March 11th at       $89.39
Change since picked:           +3.05
Earnings Date                1/21/04 (confirmed)
Average Daily Volume =         879 K
Chart =


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Aetna Inc. - AET - close: 87.57 change: -0.63 stop: 86.95

The relative strength here in AET is still amazing.  The stock
has managed to hold its impressive gains despite some strong
volatility in the markets.  On Wednesday Bank of America
reiterated their "buy" rating on AET and raised their price
target from $95 to $102.  Shares ticked higher and we raised our
stop loss to $86.95.  We're going to keep our stop loss there for
the moment.  Right now we are not suggesting any new bullish
positions in the stock.  It is very overbought and close to our
official exit target of $89.00.

Picked on February 29 at $80.79
Change since picked:     + 6.78
Earnings Date          02/12/04 (confirmed)
Average Daily Volume:       1.2 million
Chart =


Anthem, Inc. - ATH - close: 90.06 change: +0.12 stop: 86.50

While still struggling to make a convincing move over the $90
barrier, it's hard to complain about the price action in ATH, as
it continues its trend of higher lows.  Last week's brief dip
under the 10-dma (now $88.68) turned out to be a great entry
point into this very bullish trend.  The 20-dma has now risen to
$87.00, providing additional support between the current price
and our $86.50 stop.  ATH looks like it wants to continue working
its way higher, but given the way in which it has been rejected
on its last two forays over that level, we aren't recommending
new breakout entries.  Dips to the 10-dma still look like the
best bet for climbing aboard.  Our revised upside target is in
the $94-95 area and we would suggest aggressively harvesting
gains if that level is reached.

Picked on February 26th at   $85.37
Change since picked:          +4.69
Earnings Date               4/28/04 (unconfirmed)
Average Daily Volume =     1.45 mln
Chart =


Countrywide Financial - CFC - cls: 93.00 chg: -0.25 stop: 90.00

We remain concerned for our CFC play.  The stock isn't moving and
continues to consolidate in a $2.00 range between $92-94.00.
That's not necessarily a bad thing considering the market's
volatility but with mortgage rates dropping and the recent 3:2
split announcement we'd expect more enthusiasm from the bulls.
Traders can still look for dips above $90.00 as an entry point
but we'd probably be concerned if it broke $92.00 again.  More
conservative traders could wait for a move over $94.40
(yesterday's high) but keep in mind that $97.25 is new resistance
and we were only aiming for the $100 level to begin with.  In the
news CFC has announced to new joint ventures to offer their
services in various parts of the country.

Picked on February 24 at $91.63
Change since picked:     + 1.37
Earnings Date          01/27/04 (confirmed)
Average Daily Volume:       2.3 million
Chart =


eBay Inc - EBAY - close: 69.34 chg: -0.26 stop: 66.50

Buying the recent dip to the 50-dma is looking better and better
but we're still waiting for EBAY to trade back above the $70.00
mark.  Actually let me clarify that.  We were triggered a week
ago when it crossed $70.05 but we're suggesting that most readers
look for EBAY to breakout again over $70.00 before considering
new plays.  YHOO was the big leader in the Internet sector
yesterday with two broker updates and EBAY was left to jog in
YHOO's shadow.  Hopefully the recent coiling action under $70.00
is just what it looks like - a resting period before the next run
higher.  We're leaving our stop loss at $66.50 and leaving our
target at $77.50.

Picked on March 09 at $ 70.05
Change since picked:   - 0.71
Earnings Date        04/20/04 (unconfirmed)
Average Daily Volume:     7.0 million
Chart =


Juniper Networks - JNPR - close: 25.35 chg: -0.07 stop: 23.64

The good news is that JNPR is back above the $25.00 mark.  That's
one less concern to worry about.  The bad news is that the stock
appears to be consolidating sideways not upwards. Fortunately its
MACD indicator looks encouraging and about to produce a new buy
signal.  Morgan Stanley had some positive comments today and
upgraded the wire-line networking group, the semiconductor sector
and the semiconductor capital equipment industries.  MWD's
analyst suggested that their improved fundamental outlook for the
networkers was based on an improving carrier outlook, higher
capex spending and a stronger supply chain.  All told MWD expects
the networkers to out perform the S&P 500 while their best-case
scenario suggests a 29% gain for the group (over next 12 months).
JNPR was upgraded from "under weight" to "equal weight".  Let's
just hope investors are listening.

Picked on March 14 at $ 25.81
Change since picked:   - 0.47
Earnings Date        04/21/04 (unconfirmed)
Average Daily Volume:    15.7 million
Chart =


Lexmark Intl. - LXK - close: 89.75 change: -0.15 stop: 85.00

Once clear of resistance in the $86-87 area, LXK didn't waste any
time plowing higher to the $90-91 area, hitting $91.10 early
yesterday before pulling back near $90.  The stock hasn't seen
this altitude since the first half of 2000 and eager bulls are
now eagerly setting their sights on the century mark.  There's an
old adage that once it trades $90, a stock will make a run
towards $100 and so far all signs are encouraging.  LXK has made
a pretty strong run from the $82 level in the past week, so new
breakout entries over yesterday's high do not look favorable.
Even though the stock found intraday support near $89 today, the
best entries will now come on a pullback near the 10-dma
($86.04).  With our stop safely nestled under that average,
support (broken resistance) in the $85.50 area and below Monday's
low, it does look like buying the dips should continue to be a
winning strategy.

Picked on March 14th at      $85.77
Change since picked:          +3.98
Earnings Date               4/19/04 (unconfirmed)
Average Daily Volume =        903 K
Chart =


Renaissancere Ltd - RNR - close: 53.56 chg: +0.01 stop: 52.00

All right, it's nice to see RNR moving higher again after the dip
to $52.50.  Currently the stock appears to have new resistance
near $54.05-54.10 but the intraday chart is positive.  We're
still gunning for a move to the $55.95 mark but if you missed the
original entry or the dip this may be a tough place to consider
an entry. Of course it will only get worse if the stock keeps
climbing.  Conservative traders can shave off some risk by
raising their stop loss to $52.50, which we may do tomorrow.

Picked on February 15 at $50.83
Change since picked:     + 2.73
Earnings Date          02/03/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =


Taro Pharma. - TARO - close: 61.53 chg: +1.01 stop: 59.50*new*

The performance in the DRG Drug index has been dismal lately.
Yes, it's seen some volatility with the markets but there's been
virtually no bounce from its test of the 200-dma and it's hitting
new relative lows on an intraday basis.  This has impeded TARO's
performance and frankly we were considering TARO a potential drop
after yesterday's close just above the $60.00 level.  Today's
bounce was encouraging but there was not much volume behind it.
It might be wise to wait for TARO to break above the $62.00
level, which should break the trend of lower highs from mid-
February.  We're going to raise our stop loss to $59.50.

Picked on March 14 at $ 61.85
Change since picked:   - 0.32
Earnings Date        02/17/04 (confirmed)
Average Daily Volume:     284 thousand
Chart =


Quest Diagnostics - DGX - close: 82.97 change: +0.76 stop: 79.00

Company Description:
Quest Diagnostics was the result of a 1996 Corning spinoff, and
currently holds the title of the world's #1 clinical laboratory.
DGX performs more than 100 million routine tests annually,
including cholesterol, HIV, pregnancy, alcohol, and pap smear
tests.  Operating laboratories throughout the US and in Brazil,
Mexico, and the UK, DGX also performs esoteric testing (complex,
low-volume tests) and clinical trials.  The company serves
doctors, hospitals, HMOs, and other labs as well as corporations,
government agencies, and prisons.

Why we like it:
Investors cheered DGX's January earnings report and promptly
drove the stock to just below the $86 level before some much-
needed profit taking set in.  The stock fell back near the $79-80
level, but the bulls stubbornly refused to let it drop far enough
to fill the post-earnings gap down near $78.  After bottoming
just above $79 in late February, DGX has been building an
encouraging pattern of higher lows, all the while holding above
the 50-dma ($80.82), which appears to be providing a solid safety
net.  If looking for the source of the stock's strength, one
potential answer can be found in the PnF chart, which has been
strongly bullish since giving a Buy signal in September and then
smashing through its bearish resistance line in October and never
looking back.  DGX has long since met its $79 price objective, so
the PnF chart doesn't provide any illumination as to the
potential upside from here.  But looking at the weekly chart, we
can see why the stock paused near $86 last month -- that was the
site of broken support back in early 2002.

Given the recent consolidation, it appears very likely that the
bulls are going to drive DGX up to test that level again and
based on the way the stock has traded in recent months, we're
looking for a breakout and run up to at least the $90 level.
Note how there is near-term horizontal resistance in the $83.00-
83.50 area.  That level looks about to be broken with an upside
move, and breakout entries over the top of that resistance zone
look favorable.  Of course, bargain hunters may be able to get a
better entry before that on a dip back near $81, the site of the
short-term rising trendline that connects the lows of the past
few weeks.  While conservative traders might want to use a stop
just under the 50-dma, we're going to give the play a bit more
room to breathe, initiating coverage with our stop at $79, just
under the late February low.

Suggested Options:
Shorter Term: The April $80 Call will offer short-term traders
the best return on an immediate move, as it is currently in the

Longer Term: Aggressive longer-term traders can use the April $85
Call, while the more conservative approach will be to use the May
strikes.  Our preferred option is the May $85 strike, as it
should provide sufficient time for the play to move in our favor.

BUY CALL APR-80 DGX-DP OI= 142 at $4.30 SL=2.75
BUY CALL APR-85 DGX-DQ OI= 354 at $1.45 SL=0.75
BUY CALL MAY-85*DGX-EQ OI=1830 at $2.70 SL=1.25
BUY CALL MAY-90 DGX-ER OI= 303 at $1.05 SL=0.50

Annotated Chart of DGX:

Picked on March 18th at      $82.97
Change since picked:          +0.00
Earnings Date               4/22/04 (unconfirmed)
Average Daily Volume =        607 K
Chart =


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Chiron Corp - CHIR - close: 46.85 chg: -0.22 stop: 48.50*new*

Slowly but surely shares of CHIR continue to slip lower with a
steady stream of lower highs.  There is always a chance it will
spike up to its 10-dma (currently 47.67) but the trend is
certainly intact.  We're going to lower our stop loss to its 21-
dma at $48.50.  Our target remains the $45-44 range.

Picked on February 24 at $49.11
Change since picked:     - 2.26
Earnings Date          01/28/04 (confirmed)
Average Daily Volume:       1.7 million
Chart =


Eaton Corp. - ETN - close: 57.25 change: +0.10 stop: 58.75

After chopping between $54.50 and $56.00 earlier this week,
shares of ETN popped strongly higher yesterday, helped along by
the strength in the broad market.  Today's action did nothing to
clarify the near-term picture, as the stock ended the day near
its intraday high and right at the upper end of the resistance
zone we've been expecting to provide bearish entry points.  The
big question is whether ETN will roll over and then subsequently
take out its recent lows or if we're witnessing a trend reversal.
Obviously, since we're still covering the play, we're expecting a
rollover.  But that suspicion needs to be proved by price action,
meaning that the best entries will come on a break back under the
$56 level.  More conservative traders will want to see a crack
under $54.50 before playing, as that would have the stock back
under both the 100-dma ($55.35) and the recent lows, setting the
stage for the next leg down on the way to our $49 target.
Maintain stops at $58.75, just over the 50-dma (now $58.68).

Picked on March 11th at       $54.82
Change since picked:           +2.43
Earnings Date                1/21/04 (confirmed)
Average Daily Volume =      1.17 mln
Chart =


Invitrogen - IVGN - close: 68.31 chg: +0.85 stop: 70.01

Uh-oh.  IVGN is bouncing.  The stock traded up to its simple 10-
dma at $69.25 today before fading a bit into the close.  That may
be a new failed rally to consider entry point but we'd like to
see more weakness to confirm the move.  Volume hasn't been that
strong but we're still a little cautious this close to our stop
and resistance at $70.00.  A move back under $67.00 would be more

Picked on March 11 at $ 67.26
Change since picked:   + 1.05
Earnings Date        02/12/04 (confirmed)
Average Daily Volume:     910 thousand
Chart =




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The Option Investor Newsletter                 Thursday 03-18-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Oil, Defense and Internet
Option Spreads: Spring Has Sprung – New April Positions
Traders Corner: The Secret To Success
Traders Corner: Support and Resistance and Oscillator "Divergences"


Oil, Defense and Internet

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.

ChevronTexaco - CVX - close: 89.75 change: +0.83

WHAT TO WATCH: Several of the larger oil stocks are looking
pretty bullish with a bounce from the recent lows back toward
their one-year highs.  Rising crude oil prices certainly don't
hurt the picture.  CVX's bounce from its 50-dma looks buyable but
the stock has long-term resistance in the $91-92 range dating
back from early 2002.



General Dynamics - GD - close: 88.06 change: +1.11

WHAT TO WATCH: The technical picture is turning around for GD now
that the stock is bouncing from support north of the $85.00 mark.
Today's rally puts it right at the descending 10-dma and the
sideways 100-dma.  There is overhead resistance at $90.00 and its
50-dma but the week-long consolidation above $85 may be a new
bottom.  Unfortunately, its P&F chart is very bearish.  If you
think GD is headed lower look for a failed rally under $90.00.



L-3 Communications - LLL - close: 54.42 change: +0.69

WHAT TO WATCH: The technical picture is also improving for LLL.
Its shorter-term oscillators like the RSI and stochastics are
already bullish while the MACD is about to produce a new buy
signal.  LLL has been consolidating under a trend of lower highs
for the last month and it looks ready to breakout.  A trigger
over $55.00 might work.



Ask Jeeves Inc - ASKJ - close: 30.61 change: +1.26

WHAT TO WATCH: Watch out!  The Internet bulls are back; at least
if you look at shares of ASKJ.  The stock soared in early March
after issuing a positive earnings preannouncement and news that
it would buy the Excite Network, officially known as Interactive
Search.  The Excite Network is a family of websites that drew
almost 24 million unique visitors in January.  Investors are
obviously excited about the deal since shares of ASKJ are edging
higher.  Thursday's rally was a breakout above resistance at
$30.00.  The next level of resistance is the $33.88 level dating
back to September of 2000.


RADAR SCREEN - more stocks to watch

TASR $62.40 +5.62 - TASER Intl doesn't trade with equity options
(yet) but it does draw a lot of attention from momentum traders.
Today's breakout over the $60.00 looks pretty bullish but any
play (up or down) in TASR should be considered HIGH risk.

COP $70.35 +1.45 and TLM $60.39 +0.99 These are both oil & gas
stocks like CVX above.  These look bullish with the recent bounce
from their 50-dma's and breakouts over round-number psychological
levels at $70 and $60 respectively.

RSE $51.90 +0.60 Shares of RSE tend to move slowly but there is
no denying their strength.  The best place to consider bullish
positions seems to be pullbacks to the 40-dma but right now the
stock is running towards a new high.

CAKE $45.06 -1.97 The Cheesecake Factory was sliced for a 4.18%
loss on Thursday after reporting a management change late
Wednesday evening.  At least one brokerage downgraded the stock
while two more came out to defend it.  Volume was huge at 2.2
million shares or four times the average.


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Option Spread Strategies

Spring Has Sprung – New April Positions
By Mike Parnos, Investing With Attitude

It’s that time of the month again.  We’re going to get a head
start by establishing our “hypothetical” positions on Friday
instead of waiting until Monday – when premiums are lower.

Tomorrow is quadruple witching.  Sounds like my first marriage.
Maybe that was quadruple bitching.  Oh well, there was always a
lot of volatility.  And, with the recent sell-off, some of the
volatility has returned to options in the form of additional
premium.  More, but not much more.  ANY more is welcome.  That’s
how we make our living.

On Sunday we’ll go over our CPTI portfolio March results and our
Quickie results.  Things look pretty good.  Yesterday was St.
Patrick’s Day.  It was green everywhere – including our wallets.

Here are some new April positions that have a good chance of being
profitable – if the market cooperates, of course.

April Position #1 – SPX Iron Condor
Sell 4 SPX April 1075 puts
Buy 4 SPX April 1050 puts
Credit: $2.50 (x 4 contracts = $1,000)

Sell 10 SPX April 1170 calls
Buy 10 SPX April 1180 calls
Credit:  $1.40 (x 10 contracts = $1,400)

Total net credit and potential profit of about $2,400.  Maximum
profit range is 1075 to 1170.  Safety range is about 1072.60 to
1177.40.  Maintenance: $10,000

April Position #2 – RUT Iron Condor
Sell 10 RUT April 530 puts
Buy 10 RUT April 520 puts
Credit: $1.10

Sell 10 RUT April 610 calls
Sell 10 RUT April 620 Calls
Credit: $1.15

Total net credit of about $2.25.  Potential profit: $2,250.
Maximum profit range: 530 to 610.  Safety range: 527.75 to
$612.25.  Maintenance: $10,000.

April Position #3 – XAU Iron Condor
Sell 10 XAU April 95 puts
Buy 10 XAU April 90 puts
Credit: $.95 (x 10 contracts = $950)

Sell 10 XAU April 110 puts
Buy 10 XAU April 115 puts
Credit: $.55 (x 10 contracts = $550)

Total net credit: $1.50.  Potential profit: $1,500.  Maximum
profit range $95 to $110.  Safety range: $93.50 to $111.50.

April Position #4 – OSX Calendar Spread Plus – 108.03
OSX is the Oil Index.  This is a play on the common belief that
oil prices will continue to move up over the next month or two.
Buy 10 OSX June $115 calls @ $3.20 (36 delta)
Sell 10 OSX April $115 calls @ $1.05 (23 delta)
Cost:  $2.15

Since my recent column on calendar spreads, I received emails
requesting  we put on a calendar spread.  You know I’m not
thrilled with directional trades, but this one may have some
potential.  Notice how we bought the June $115 to give us
flexibility and a 36/23 delta advantage.  We may only hold this
trade for a month, but the extra two months provide us with many

More aggressive traders, who believe in the direction of OSX, can
also put on an April $100/$90 bull put spread and take in an extra
$.60 ($600) to reduce the cost basis to $1.55.

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


Position #1 – OEX (S&P 100 Index) Iron Condor – 550.69
We sold 12 OEX March 595 calls and bought 12 OEX March 605 calls
(Bear Call Spread).  Then we sold 12 OEX March 540 puts and bought
12 OEX March 530 puts (Bull Put Spread).  The total net credit was
$1.20 ($1,440).  Maximum profit range: 540 – 595.  Maintenance:

Position #2 – RUT (Small Cap Index) Iron Condor – 574.55
We sold 8 RUT March 610 calls and bought 8 RUT March 620 calls
(Bear Call Spread).  Then we sold 8 RUT March 550 puts and buy 8
RUT March 540 puts (Bull Put Spread).  The total net credit was
$2.75 ($2,200).  Maximum profit range: 550 - 610.  Maintenance:

Position $3 – MNX (Mini-NDX Index) Iron Condor - $141.78
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 - $144.62
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).

QQQ ITM Strangle – Ongoing Long Term -- $35.34
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.
April: Apr. $34 calls and $37 puts – credit of $750
Total credit: $8,050.

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 – 550.69
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.  That
guarantees the principal $100,000 investment.  We’re trading the
remaining $26,000 to generate a “risk free” return on the original

Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 = $24,300)
March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930)
March: 535/525 Bull Put Spread for credit of $1.10 (x 300 = $330)
Current cash position is $2,960 ($1,260 plus the unused $1,700).

Adjustment:  This week we bought back the 3 OEX March 585 calls
for $.10 and sold 3 of the March 560 calls for $1.35.  A credit of
$1.25 x 300 = $375.00.

Today (Thursday), we bought back the March 560 calls for only
$.15, locked in $120 x 3 = $360 of profit.  Now, we’ll wait until
we see what’s going to happen on Friday and then roll out to April
before the market closes.  We’ll probably also roll out the
535/525 bull put spread before Friday’s close.

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner."  They're waiting for you

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

Mike Parnos
CPTI Master Strategist and HCP

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


The Secret To Success
by Mark Phillips

There are many ways of measuring success, but in the trading
world, it is pretty simple.  Make more money than you lose.
Sounds simple, right?  Unfortunately many traders fall far short
of that goal and quite simply it is due to a lack of a clearly
defined goal and a plan for achieving that goal.  That's right
sports fans, it's time for the regular reminder to
write/modify/finish your trading business plan.  If you've already
completed that task, stick around because we're going to cover
some new territory.

There are a few ways in which to achieve that simple goal stated
above.  The first way is to win more trades than we lose.  Another
method would be to allow for more losers than winners, but make
the size of the winners so much larger than the losers as to still
win the numbers game.  Me, I like the combination of both methods,
where we endeavor to win the majority of our trades AND have the
size of the winners swamp the losers in size.  I know, it still
sounds great -- where's the secret?

Let's break the question up into two pieces so that we can handle
the two sub-goals separately.  Our first goal of winning more
trades than we lose comes about from all the tools of our trade
that enable us to measure the odds of success.  That's right,
we're talking technical analysis.  I don't care if you use naked
candle charts, oscillators, moving averages, momentum studies or
some other combination.  Technical analysis is an individual study
which embodies as much art as science.  Our job as individual
traders is to find what works for us and matches our trading
style.  That's right, we each have to do our own back-testing,
whether we do it by hand (dragging back those charts and looking
at past price performance) or programming a computer and letting
it sift through reams of historical data.

In the end, what we're looking for is a mix of technical
indicators or signals that when combined will provide more winning
trades than losing trades.  The key to me achieving that elusive
goal was when I learned about Point & Figure (PnF) charts and
began to incorporate them into my daily technical analysis
routine.  Believe it or not, PnF charts are an integral part of
both aspects of the success formula I'm talking about -- achieving
a better than 50% win/loss ratio and making the winners bigger
than the losers.

PnF charts don't care about volume or time or any of the little
price squiggles within the trend.  They only care about price, and
then only when it is making meaningful price moves capable of
giving us those 3-box reversals or generating new Buy and Sell
signals.  Over the years that I've been watching these charts,
I've found that they have a very good success rate at determining
whether the buyers or sellers are in control.  Like any other
creation from the land of technical analysis, they can be wrong
from time to time, but I've found they are right more often than

So we can make a very simple rule in our trading plan.  Only trade
long on stocks that are bullish on their PnF charts and only trade
short on stocks that are bearish on their PnF charts.  The great
advantage in doing so is that it eliminates the compulsion to try
picking bottoms and tops in stocks.  If the PnF chart is on a Buy
signal, then we ONLY want long trades.  If we can't see a long
entry in line with our more precise entry criteria, then we should
not trade that stock.  While this may seem overly restrictive,
I've found that there are still plenty of viable trades out there
and this one simple rule eliminates a lot of mediocre to poor

That brings us to the other side of the equation, that of making
the winners significantly larger than the losers.  One of the neat
features of PnF charts is that they can be used to generate price
targets once a Buy or Sell signal is given.  We shouldn't think of
these price targets as carved in stone.  Rather, they give us a
solid estimate of how far a price move has the ability to extend.
There are plenty of instances where price targets are not reached
or where they are exceeded, but I can't tell you the number of
times I've seen a PnF chart forecast a move that seems
inconceivable, only to watch it unfold with amazing precision.
For instance, last September QCOM issued a new Buy signal with its
breakout over $40 and by the time the vertical column completed at
$46, the bullish price target of $67 looked more than a bit

QCOM makes such a great example of how the PnF chart can be
combined with standard price charts, that I want to spend the
remainder of our time dissecting it.

QCOM PnF Chart

Look how price steadily advanced after that Buy signal back in
late August.  Since that point in time, there hasn't been a single
PnF Sell signal and QCOM is getting awfully close to that $67
price target that was generated 6 months ago.

QCOM Daily Chart

With a solid bullish bias on the PnF chart, we turn to our price
chart (my apologies for it being so compressed, but I wanted the
entire timeframe on one chart) and look for bullish entry points.
I've just shown QCOM with its ascending price channel and an
unconventional Stochastics oscillator.  Look at the setting on
Stochastics and if you can figure out the logic to the parameters,
you'll have a big leg up on our topic for next week, which I think
you'll find VERY interesting.  But I digress.  This chart is where
we get our entry points.  There were exactly 3 entry points into
this bullish trend, one near $43, the next near $47 and most
recently at $56.

Note that we completely ignore the bearish signals, as we only
want long positions in agreement with the bias given by the PnF
chart.  Now turning to the PnF chart, our initial entry at $43
comes with a stop at $35, as QCOM would have to trade that price
level to generate a Sell signal.  That gives us a $24 potential
return and an $8 risk.  A nice little 3:1 reward to risk ratio.
The next entry point comes near $47, and at that point, our risk
is to $43, the level that would then give us a Sell signal.  Here
we're looking at $20 of upside potential and only $4 of downside,
for a 5:1 reward to risk ratio.  Finally, in early February, we
get an opportunity to enter near $56-57.  That's $10 of potential
upside, but we have risk all the way down to $48.  That's roughly
a 1:1 reward to risk ratio, and I think I'd actually avoid an
entry at that point, as I can't skew the odds heavily enough in my

Now you'll notice that there were several points over that 6-month
span where some traders might have seen the price roll over and/or
the Stochastics sell signals and tried a bearish position.  Can
you see how the PnF chart keeps your focus aligned with the
dominant trend?  By taking only the bullish entries in alignment
with the PnF chart, we both increase our odds of a successful
trade AND we give ourselves the ability to quantify our risk to
reward ratio.

It is this sort of disciplined approach that will serve us very
well in our trading business, as it keeps us taking only the
strong trades that are in agreement with both the supply/demand
dynamic, as well as the short-term up and down cycles in price.
The one other MAJOR component to our success formula has to do
with account management, and it is absolutely CRITICAL to get this
right.  But we'll have to save that discussion for another time.

I hope this helps!



Support and Resistance and Oscillator "Divergences"
By Leigh Stevens

"I Just started reading your column within the last couple of weeks and
your support/resistance predictions are very impressive. If you could
tell me more and help answer some questions, I'd really appreciate it!

I've done some options, but I'm never quite comfortable deciding which
strike price, expiration and so forth is best to use. Even though I
usually only hold them for a few days to a few weeks, I tend to go with
an expiration that's 2 or 3 months away (comfort zone) and I try to
stay 1st in the money, or 1st out of the money.

1. Would you please tell me what you usually do?
2. Will using QQQ's with NDX parameters work okay?
3. Do you have a minimum that you use for "Open Interest"?
4. Do you have a minimum that you use for "Volume"?

I greatly appreciate any input you can provide!"

I should say thank you for taking the time to write this note and
give me something to work "off from" so to speak.  We work for
you and I don't always know what aspects of what I do are of
interest and value to OIN Subscribers. These questions help.

I'll respond to questions 2-4, which are easier, then tackle
question 1, which can be shown pretty much only with a replay of
the charts I used in my Index Trader wrap last Sunday (3/14/04).
Question # 2 - yes, QQQ's track the NDX very closely so
parameters are close enough to trade off from.
#3 - For Index futures - no minimum for Open Interest.  Maybe I
don't understand the question, but mainly open interest is useful
when it diverges from the trend; e.g., open interest is declining
when the market is going up - it's going up on short covering, so
beware the staying power of the rally.

Your Question #4 - No minimum for volume - again, am not sure I
understand the question, but daily trading volume is whatever it
is and that is about all I use as far as "volume"; i.e., trade
volume - not "tick" volume, etc.

Re your first question: Saying what I "do" is pretty hard, as it
is such a combination of things that I use to try to figure out
support and resistance areas alone - plus to be able to predict
at which of these points an Index might turn or reverse trend.
However I can discuss the points I used in my last Index Trader
(3/4/04) and give some more background and explanations to how I
was figuring support areas and why those might also be points to
buy (in this case) Index calls.

I like to buy Index calls and puts and to achieve a good profit
means buying them "right" of course.  Buying them right is like
paying wholesale and not retail. That is, anticipating WHERE the
market will turn and taking a chance at buying calls at a
significant support area and puts at a significant resistance.

These are points where two things happen:
1. Premiums are cheap as the market hasn't turned (reversed) yet.
2. It doesn't "cost" as much - why?  Because you can exit just
below or above support or resistance when the projected
support/resistance areas are penetrated.

I also tend to go out at least a few weeks in terms of expiration
and to stay more or less at the money in terms of strike. I don't
go out probably as far as 2-3 months away, but perhaps have
reason to be comfortable in my "timing" and ability to ANTICIPATE
support and resistance.

The greatest option trader I ever knew, Mark Weinstein (not the
writer, rather a very private trader) - a complete unknown except
for being in Jack Schwager's "Market Wizards" book.  He had the
kind of confidence I am speaking about as far picking buy points
ahead of where the market reversed.  And, this trader taught me
that, for catching the bigger moves, it was necessary to
anticipate areas to buy options before the crowd bought them and
the market makers jacked the premiums way up.

It's a well-known style or theory and one even Warren Buffet uses
so well - buy em when no one wants em or when the world isn't
looking at the thing.

Getting back to the "how to" aspect - there are a few different
things that I use in the way of indicators or patterns and chart
examples follow -

A high potential area for the market to find support is at a
trendline - especially when a correction is more "technical" in
nature; e.g., the market got overextended and stocks are being
sold that got overvalued and would be buyers are backing off from
doing new buying until valuations get cheaper again. The trend is
up still, the fundamentals are not all that different and
trendlines, for various reasons, are the best point to anticipate
a buy.

There is an art to drawing trendlines.  Draw them though 2-3 lows
in the case of an uptrend line and through the MOST number of
points - don't worry about what they say in "charting 101" about
being at the lowest low always.  (The reverse is true for
downtrend lines sloping down.)

Draw a LOT of trendlines and you keep learning what works.  In
the Dow chart below, I ignore the downswing low before this very
last one. Why? - because the straight line could be drawn through
the first two lows.

Trendlines are even more significant if OTHER indicators also
suggest that the market is at an extreme.  Look at the RSI
Indicator, which is one of the oscillator type
overbought/oversold indicators (also, stochastics) and the it was
at an extreme as prices came down to the up trendline.

The thing with things like trendlines is that you need to develop
some faith that they "work" more often than not - it's not that
you have the attitude that I will believe it when I see it -
waiting until there is a strong recovery rally will mean that the
option will not be as cheap.  That's ok too, but this is my style
and I have developed some confidence in trendlines, especially
coupled with other technical patterns.

There's another thing with trendlines that gives me what I often
find is a high risk to reward outlook.  I will exit the trade as
soon as there is even a minor penetration of the trendline - say,
not by more than a percent.

It helps when you see 2 or three days worth of lows around the
same point.  DXJ comes down to the 100.9 area 2 or 3 days
running.  I won't even figure I need to give it to 100.1 to exit.
I will set 100.6 as my stop or exit point on long DJX calls - if
the Dow is being supported and finding buying interest at around
10100, then that area won't give way by much.

Use em!  If an Index or a stock for that matter retraces around
half of what it gained on the last rally, a 50% giveback is about
all it will typically give back before reversing back to the
upside in an uptrend - the exact reverse in a downtrend.

Is the Index, the S&P 100 (OEX) in this case in the chart below,
going to exactly hit the 50% retracement?  Often not, as that is
"too easy" or too obvious to hold out for those exact points.

In this example here, relative to the OEX, buying interest is
coming in when the S&P has made approximately (not always
exactly) a one half retracement of the last major advance.

Wait for perfection is like expecting or waiting for the Dow to
get back to 10,000 - then, I'll buy!  Oh yah, and I'll wait for
the most beautiful woman in the world to show up and only her.
We're talking about the market here, which has as its
participants some of the smartest people in the world.

Moving average envelopes are something I use a lot mostly for the
Indexes.  I discussed their use in a prior Trader's Corner
article at -

The point with envelopes is also that there is some "art" in
using them and part of that is knowing that they give not only an
idea of when the market is extended, such as on the downside, but
what that price area might be based on prior history of
volatility or range.

Why did I have the lower band set so that the lower line was 3%
below the 21-day moving average?  Well, as above (often) so
below.  When, in an uptrend the highs are tracking a moving
average envelope line that is 3%, I often assume that in a good-
sized correction, the lows will also reach that same extreme.

Of course, a downtrend can just follow this line lower and it
does not necessarily mark a reversal point.  Again, look at both
this and other indicators for further clues. At a minimum I often
figure that a first rally will take the Index back up to the 21-
day moving average.

The use of the 21-day moving average is important.  The 3% bands,
for the S&P 500 "works" with this moving average pretty
consistently - exceptions occur and the market gets more volatile
or more extreme, but I am talking about the "average" condition
over time.

Getting back to the use of other indicators to suggest the
likelihood that SPX was likely to rebound from the area of the
lower envelope line - several lows in this area was a tip off.
More than that was what was happening to my chef "sentiment"
indicator, my Call-Put option ratio of daily CBOE call volume to
put volume for equities options.

When traders get so bearish that they are trading as many
puts as calls, the resulting 1-day readings of 1.1 or less
often have signaled a bottom for a correction.  Not always,
and it is situational; e.g., a correction going on in a
market whose dominant trend is still up.

The 5-day Call-Put average shown above is not so important
but I also look at it - and it got almost to the same low
reading, unlike what had occurred in many months.  So, with
the move down to the lower trading band in the S&P 500 AND
the extreme on my call-put indicator, a call buy
opportunity was strongly suggested for me.

More on the use of this custom indicator can be found at -

I also, and you probably have noticed, that I work with
trendline channels a lot, both on hourly and daily charts.
What you can see on the daily chart is often what you can
also see on the hourly charts, only in better detail.  A
couple of examples of these follow.

It's a tip off to buying developing or emerging buying
interest when lows start being made repeatedly in the same
area. And when that area is also at the lower boundary of a
trend channel or a single trendline that intersects 2-3 or
more lows. The upper channel line is simply the parallel
line to the lower one in this example of the Nasdaq 100
Index (NDX) below.

In terms of price and numbers, the even 100 numbers on the
indexes of larger size (also, SPX) are common areas of
buying (or selling) interest.  With an oversold market and
the retreat from the 1500 area, buying at 1400, basis the
Nasdaq 100 or NDX, was a pretty good bet.

A related suggestion for a good tradable bottom is when
both short-term and longer-term oscillators like the
Stochastics Indicator both reach extremes at the same time.
I especially tend to rely on length set to 21, a fibonacci

In the Stochastics indicators above, one is measuring
momentum and "overbought/oversold" on both a 5 and 21-hour
basis; trading hours of course, so the 21-hour Stochastics
measures a 3-day trading cycle - 7 hours of trading X 3.

Going back to the question of trading the QQQ Nasdaq 100
tracking stock based on the NDX chart - well the chart
below has of course the same pattern in terms of the hourly
trend channel.

Prices are different of course.  With the stock you can set
actual (sell) stops as an order in with the (AMEX) exchange and
precisely set just a bit under the downtrend channel line as it
develops - not too close.

In recent price action above, the first instance that prices came
down to the channel line, an exit or sell stop order I would use
to try to keep my loss small, would be at 34.4 - figuring both
that there could well be a second "touch" to the downward sloping
line and that 34.5 would be a likely area of support (if broken,
I would want out). The even numbers and half numbers are typical
for that in the Q's.

I was going to include a discussion of the use of oscillators,
especially the RSI indicator, when they also have established a
bullish or bearish "divergence" relative to these tip offs I've
discussed for buy/sell points, but the hour grows late and I'm at
or beyond our deadline.  For next time - enough for now.

Good Trading Success!


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