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Daily Newsletter, Thursday, 04/01/2004

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The Option Investor Newsletter                Thursday 04-01-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: April Fools
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Too Optimistic


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      04-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10373.33 + 15.60 10419.04 10342.59 1.91 bln 2132/1097
NASDAQ   2015.01 + 20.80  2019.09  1996.45 1.82 bln 1980/1148
S&P 100   553.64 +  2.51   555.87   551.12   Totals 4112/2245
S&P 500  1132.17 +  5.96  1135.67  1126.20
W5000   11107.42 + 68.00 11132.06 11039.42
SOX       495.32 +  8.20   498.78   487.12
RUS 2000  595.32 +  5.01   596.15   590.31
DJ TRANS 2918.66 + 23.20  2918.79  2896.76
VIX        16.65 -  0.09    17.25    16.65
VXO (VIX-O)17.15 +  0.42    17.44    17.01
VXN        23.41 -  0.35    24.02    23.32
Total Volume 4,056M
Total UpVol  2,907M
Total DnVol  1,080M
Total Adv  4644
Total Dcl  2576
52wk Highs  563
52wk Lows    28
NasTRIN    0.61
TRIN       0.89
PUT/CALL   0.61

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

April Fools
by Jim Brown

AT&T, EK and IP were kicked out of the Dow. Google is seeking
employees to work in an oxygen depleted environment. The
administration is ready to reinstate cheap generic gasoline
and Martha Stewart wants a retrial because a juror may have
hit his girlfriend several years ago. Which of these events
is not true?

Dow Chart - Daily


Nasdaq Chart - Daily



Actually they are all true to some extent. Google did post
an advertisement asking for candidates to work at its lunar
hosting facility. "This unique opportunity is available only
to highly-qualified individuals who are willing to relocate
for an extended period of time, are in top physical condition
and are capable of surviving with limited access to such
modern conveniences as soy low-fat lattes, The Sopranos and
a steady supply of oxygen."
http://www.google.com/jobs/lunar_job.html

While that may have been the highest profile April Fools
joke there were several other news events that could have
qualified. Google actually may be regretting its joke
because it prompted the announcement of its Gmail.com
email service to be seen as an April Fools joke as well.
The company was quick to respond that it really was going
to offer a web based email service to compete with Yahoo
and Hotmail. The service will be free and provide 1000MB
of storage per user. Rumor has it that the Google IPO
could be as early as the end of April. A little marketing
buzz in advance sure did not hurt.

The Dow managers did announce today that AT&T, IP and EK
were being replaced by PFE, AIG and VZ. AT&T has been in
the Dow since 1939 and was also in it for 12 years prior
to 1928. EK has been in the Dow since 1930 and IP since
1956. These companies are being replaced as no longer
reflective of the broader business environment and not
representative of corporate America. AT&T has been cutting
off limbs for years and is only a fraction of its former
self. Ironically SBC was added to the Dow in 1999 and it
was one of the pieces previously split off from AT&T.

Eastman Kodak has also shrunk to a much smaller part of
the economy with the traditional film market being taken
over by overseas companies. Kodak was slow to jump on
the digital camera revolution and while they may be on
a revitalization program they are no longer a true Dow
company according to the managers. International Paper
was dropped according to the managers due to materials
companies no longer being representative of a broad
portion of the US economy. This emphasizes the emergence
of high tech and services sectors as more important to
overall GDP.

Pfizer is the second largest market cap company behind
GE and is a natural inclusion into the Dow today. The
financial sector will gain additional representation from
AIG. The change will take place before the open on April
8th. It will not have any immediate impact on the Dow's
level as the index will be rebalanced after the close on
Wednesday based on the closing prices of each component.
This is done by re-weighting the individual components
based on the closing price to equal the index price at
Wednesday's close. The Dow is price weighted and as of
today's close the price of the three stocks being voted
off the island was $86.66 and the three new stocks were
worth $145.86.

Oil prices dropped substantially to close at $34.27 after
the administration said it was considering exempting some
states from the stringent emission standards to allow the
cheaper and more easily produced gasoline to be used. The
unleaded gasoline futures dropped -5% on the news and oil
prices broke below recent support. Hold the applause, you
would probably not see any impact to pump prices for at
least a month.

Oil Chart - Daily



Rounding out the April Fool questions Martha Stewart does
want a retrial based on supposed errors in omission from
a juror. Stewart's attorneys claim juror Chappell Hartridge,
47, lied on his paperwork by omitting the fact he had been
arrested for hitting his girlfriend in 1997. They claim
that a violent act against a woman evidences extreme
misogynistic tendencies and made him unfit to sit on a
jury with a woman defendant. Hartridge did not mention it
because the complaint was dropped and charges were never
filed. Grabbing at straws Martha?

Moving back into the more mundane events the Jobless Claims
fell -3000 from last weeks number but that number was
revised up +6000. Net result was number +3000 higher than
the number announced last week. This constant backward
revision process is a major pain in the accounting process.
We just need to have them add the "found" claims to the
current number instead of the prior week. It is an economic
shell game where they can rearrange the numbers for weeks
at a time to impact the outcome. Just report them as they
find them and be done with it.

Construction spending fell -0.1% and posted the second
monthly drop. The prior month was revised down from -0.3%
to -0.8%. This report was ignored because of the historical
nature, February, and the abundance of more important data.

The much delayed PPI number showed a rise of +0.1% and
well under consensus estimates of +0.5%. Estimates were
higher due to a larger expected impact of higher energy
prices. There was some evidence of inflation with core
intermediate goods rising +0.9% and core crude goods rising
+5.5%. These are very strong jumps and were predicated on
the constant rise in commodity prices up +3.5% for durable
goods and +12.4% for steel.

The ISM Index for March rose to 62.5 and well over consensus
estimates of 60.5. This was a strong report and relieved
some of the fears that the economy had peaked in January.
The internals showed minor improvements but still upward
motion in the critical components. Only New Orders,
Inventories and Imports declined slightly. Unfortunately
the component with the biggest jump was the Prices Paid
which jumped from 81.5 to 86.0. This suggests inflation
is creeping into the system. The backlog of orders rose
to its highest level since the recovery began at 63.5.
The current string of five months with the headline number
over 60 is the longest string of strong monthly expansion
since an eight month string in 1983.

ISM Index Component Table



The Risk of Recession report rose to 9.4% chance of a new
recession and this has been steadily climbing since the
low of 3.4% in November. Components impacting this number
are the stock market, consumer confidence, jobless claims
and average work week. At 9.4% this is still not a problem
but bears watching over the next couple months.

After the close today Gateway announced it was closing
all of its retail stores and 2500 employees would be laid
off from the move. Gateway said it was continuing to lose
money from the retail side after the eight year effort.
They are continuing to seek other methods to market their
products but for now they are depending on phone and web
orders. Gateway rose in after hours trading after the
announcement.

Airlines gained a little ground after the drop in oil
prices but still remain under pressure. Every $1 price
in the cost of oil translates to a $500 million loss to
the airlines on an annual basis. Considering they will
lose $2.1 billion as a group in 2004 they still need a
lot of help. The odds are good today's drop in oil is
only temporary.

The first quarter ended on Wednesday and it was the first
losing quarter by the Dow in a year and the first by the
Nasdaq in six quarters. The indexes resolved to not let
it happen again and stormed out of the gates this morning
with strong gains. The Dow rallied to 10419 and the Nasdaq
to 2019 before sellers appeared. The rest of the day was a
low volume battle as traders positioned themselves in front
of the jobs report due out on Friday. The indexes did jump
at the close on either short covering or positioning and
the Nasdaq is now positive for the year at 2013. Just a
day to late for the calendar historians.

The gains for today where muted despite closing at new
two week highs. The bets have been placed and everyone is
waiting for the only economic report due out tomorrow. The
Jobs report is still drawing high profile estimates from
analysts but the official consensus is still 100,000. The
official whisper number (a contradiction of terms?) is now
125,000 but reality may be much different. There is a way
for institutions to purchase options on the expectations
for the report. This allows them to place bets or hedges
on the announcement. The highest volume of options today
were in the 50K-75K range which indicate the real consensus
is a lot lower than the 125K to 250K being tossed about in
the media.

Jobs Table - Last Nine Months



Unless the number is well over 100K it is likely to be seen
as less than exciting. However, with the better than expected
ISM today and the coming earnings cycle there is an outside
chance that a consensus number may actually be met with
buyers. While I think the expectations are already priced
in the bullishness in today's market could be pointing to
an April earnings run. The jobs number may be seen as a
green light if it is just not as bad as some fear. Obviously
everybody has an opinion about tomorrow's outcome and when
the bad news bulls are in control the answer may not matter.

From a technical standpoint we are very extended from last
weeks lows and we are facing a weekend ahead. The odds for
some profit taking before the close are very good. If we
do move higher the Dow has resistance at 10450 and the
Nasdaq at 2050. Both of those levels could be reached on
Friday with any decent jobs news but odds are good they
will not hold into the close without a blowout. Remember
a very strong jobs number dramatically increases the chance
for a Fed rate hike sooner rather than later. Keep those
stops tight on any bounce and look for another potential
buying opportunity next week.

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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_040104_1.asp


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

Too Optimistic
- J. Brown

The markets were a lot more bullish than they may have appeared
on Thursday.  Oh sure the Industrials, the NASDAQ and the S&P 500
were all positive but the internals were stronger than you might
have expected.  Advancing issues outpaced decliners 2-to-1 on the
NYSE and 19-to-11 on the NASDAQ.  Up volume was very strong at
more than twice the down volume on the NYSE and nearly three
times down volume on the NASDAQ.  Only five out of the 25 sector
indices that we follow were red today and only the oil service
stocks really felt any selling.  This is not what you'd expect
from a market that's supposed to be worried about tomorrow's non-
farm payrolls number.

Therein lies the problem.  The markets don't appear to be too
worried.  Yes, we've churned mostly sideways the last three days
and the Chicago PMI's employment component unsettled many
investors.  But that was all forgotten when the ISM employment
number turned out so well this morning.  Suddenly instead of
hoping that we just meet the government's estimates of 125,000
new jobs we're hearing rumors that the whisper number on Wall
Street is 200K or more.  That smells like a big set up for a
disappointment, especially since the jobs report has disappointed
us four times in a row.  Don't get me wrong.  I'd love to hear a
strong jobs number.  Then we could focus on what should be a very
bullish earnings season.  The challenge here is that when
everyone's leaning one way the market tends to come up with a
surprise.

All three of the major indices have rallied toward overhead
resistance at the 50-dma's, although the Industrials are a bit
farther away than the NASDAQ and S&P 500.  If the jobs number is
good we're set up for a big blow out.  If not it's the perfect
place to short with resistance directly overhead.  It's not that
often that you see the VXO and the markets moving the same
direction.  It happened today because traders were buying more
puts to protect themselves from a negative surprise.

I'd say investors are optimistic but the smart ones are expecting
a disappointment.  Trade carefully!


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  7979
Current     : 10373

Moving Averages:
(Simple)

 10-dma: 10233
 50-dma: 10464
200-dma:  9843



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  847
Current     : 1132

Moving Averages:
(Simple)

 10-dma: 1111
 50-dma: 1133
200-dma: 1059



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1018
Current     : 1453

Moving Averages:
(Simple)

 10-dma: 1415
 50-dma: 1463
200-dma: 1386



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

It's not often that we see both the markets and the volatility
indices moving the same direction.  Well, at least the VXO was
higher today and probably due to traders buying puts to protect
themselves from any unpleasant reactions if the jobs number
disappoints.

CBOE Market Volatility Index (VIX) = 16.65 -0.09
CBOE Mkt Volatility old VIX  (VXO) = 17.15 +0.42
Nasdaq Volatility Index (VXN)      = 23.41 -0.35

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.61        862,321       524,115
Equity Only    0.47        676,577       317,796
OEX            1.22         26,575        32,342
QQQ            2.12         33,229        70,430


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

Bullish Percent Data

           Current   Change   Status
NYSE          71.6    + 1     Bull Correction
NASDAQ-100    44.0    + 5     Bear Correction
Dow Indust.   83.3    + 3     Bear Confirmed
S&P 500       74.8    + 1     Bear Confirmed
S&P 100       78.0    + 1     Bull Correction


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: 0.81
10-dma: 1.23
21-dma: 1.41
55-dma: 1.16


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    1877      1941
Decliners     954      1129

New Highs     231       151
New Lows        8         7

Up Volume   1290M     1308M
Down Vol.    547M      442M

Total Vol.  1853M     1797M
M = millions


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

Commitments Of Traders Report: 03/23/04

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 pared back their positions in both long and
short plays but they remain next short, which is a change in
sentiment over last week.  Small traders significantly altered
their short positions but remain net long.


Commercials   Long      Short      Net     % Of OI
03/02/04      411,932   418,936    (7,004)   (0.1%)
03/09/04      418,394   433,237   (14,843)   (1.7%)
03/16/04      454,635   449,505     5,130     0.6%
03/23/04      401,456   418,732   (17,273)   (2.1%)

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
03/02/04      148,383    84,135    64,248    27.6%
03/09/04      155,947    88,317    67,630    27.7%
03/16/04      159,054   115,023    44,031    25.3%
03/23/04      130,648    89,943    40,705    18.5%

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


E-MINI S&P 500

Commercial traders chopped off a large chunk of open positions
from both their longs and shorts and what was left behind is
their most bullish reading in weeks.  Small traders are still
bullish too.


Commercials   Long      Short      Net     % Of OI
03/02/04      344,805   395,112    (50,307)  ( 6.8%)
03/09/04      431,623   485,268    (53,645)  ( 5.9%)
03/16/04      472,809   574,241   (101,432)  ( 9.7%)
03/23/04      268,647   294,930    (26,283)  ( 4.7%)

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
03/02/04     119,382     67,453    51,929    27.8%
03/09/04     135,233     76,558    58,675    27.7%
03/16/04     192,136     96,691    95,445    33.0%
03/23/04     131,879     59,210    72,669    38.0%

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


NASDAQ-100

We see the same reduction in outstanding positions in the NDX
futures but commercial traders have become more bullish on
the NASDAQ while small traders have become bearish.


Commercials   Long      Short      Net     % of OI
03/02/04       49,959     41,059     8,900    9.8%
03/09/04       57,368     46,082    11,286   10.9%
03/16/04       68,285     54,899    13,386   10.9%
03/23/04       52,014     34,017    17,997   20.9%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  13,386   - 03/16/04

Small Traders  Long     Short      Net     % of OI
03/02/04       11,605     7,128     4,477    23.9%
03/09/04       15,533     8,070     7,463    31.6%
03/16/04       27,859    18,333     9,526    20.6%
03/23/04        9,884    12,887    (3,003)  (13.2%)

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

Ouch! Commercial traders have switched from bullish to almost
bearish with a large drop in long positions and a big jump
in shorts.  Meanwhile small traders have moved from strongly
bearish to bullish.


Commercials   Long      Short      Net     % of OI
03/02/04       27,594    14,166   13,428      32.2%
03/09/04       26,867    12,845   14,022      35.3%
03/16/04       32,317    17,514   14,803      29.7%
03/23/04       23,048    22,119      929       2.1%

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
03/02/04        6,898    15,874   (8,976)   (39.4%)
03/09/04        7,053    19,159  (12,106)   (46.2%)
03/16/04       10,002    20,970  (10,968)   (35.4%)
03/23/04        8,344     6,734    1,610     10.7%

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 04-01-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: LTR
Call Play Updates: AVID, CAT, KBH, LXK, MGG, NEM, NSM
New Calls Plays: EBAY
Put Play Updates: UTSI
New Put Plays: AHC


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

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


CALLS:
*****

None


PUTS:
*****

Loews - LTR - close: 59.48 change: +0.42 stop: 59.25

LTR could be building a very clearly defined bear flag pattern
but the stock has done nothing but go up since we added it to the
play list.  Fortunately, we remain untriggered since LTR never
hit our entry point at $57.74.  Traders still interested in the
stock can watch its 40-dma, current overhead resistance and its
50-dma, current short-term support.  The $60 level will also act
as resistance.  Keep an eye on its MACD oscillator too, which
could be ready to signal a new buy signal in a couple more days.

Picked on March xx at $ xx.xx <--- see trigger
Change since picked:   + 0.00
Earnings Date        02/12/04 (confirmed)
Average Daily Volume:     421 thousand
Chart =



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option* and futures traders. The combination of the proven Man
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all trading needs provide customers with the tools needed for
success.

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

Avid Technology - AVID - cls: 47.36 change: +1.23 stop: 42.99

We strongly considered closing AVID today even though the stock
was up 2.66%.  Shares have been churning sideways under
resistance at its 200-dma and Thursday marked the second failed
rally attempt over the 200-dma in the last four sessions.
However, we really like the bullish P&F chart and the company
announced that was expanding a deal with Meredith Corp to convert
six more stations to AVID's software.  We're going to keep it on
the play list but we don't suggest new bullish positions unless
AVID can close above the 200-dma.

Picked on March 29 at $ 47.35
Change since picked:   + 0.01
Earnings Date        04/15/04 (unconfirmed)
Average Daily Volume:     663 thousand
Chart =


---

Caterpillar - CAT - close: 79.00 change: -0.07 stop: 77.49

The Dow Industrials has managed to maintain its gains but it
isn't losing ground either.  CAT, a Dow component, is following
along like a good little soldier and churning sideways with the
index.  Bulls did try to get a run started this morning but it
failed at $80.04, just as it did on Tuesday.  We remain
UNTRIGGERED until CAT can trade at $80.05 or higher.  To be
honest we're happy to wait.  The Jobs report tomorrow could
launch the market either direction and it's safer to sit on the
sidelines.  The good news is that CAT's negotiations with the UAW
union didn't breakdown and there was no strike even through the
March 31st midnight deadline has come and gone.  Instead the two
have agreed to extend the deadline to April 18th while they
continue to talk, which has been dragging on since December 10th
last year.  This would be the main headline risk for bulls is
that CAT doesn't reach an agreement and its UAW employees do
strike.

Picked on April xx at $ xx.xx <-- See Trigger!
Change since picked:   + 0.00
Earnings Date        04/22/04 (unconfirmed)
Average Daily Volume:     2.5 million
Chart =


---

KB Home - KBH - close: 80.20 change: -0.60 stop: 76.95

The entire homebuilding sector has run into some profit taking
the last couple of sessions and KBH joined the crowd this time
and slipped lower with them.  The good news is that the stock
managed to close above round-number support at $80.00.  However,
we don't expect this to hold if the market moves lower tomorrow
on bad economic data.  Bulls can look for a dip to the 21-dma
near $78.35 as a potential entry point.  Keep in mind that the
homebuilders may move contrary to what we might expect tomorrow.
Hopefully the job number comes in strong and KBH along with the
markets move up.  Yet if the job number comes in too strong then
investors might over analyze it and sell interest-rate sensitive
stocks (i.e. homebuilders) on fears that the Fed might raise
rates sooner than expected.  We don't believe this to be a
rational fear but no one said the markets were logical.  We
honestly expect the Fed to be on hold until we see several months
of strong job growth.  Conversely if the job number disappoints
the homebuilders might be able to shake off any market weakness
and inch higher since the Fed will be on hold just that much
longer.  KBH issued a press release today.  Management has
decided to issue a cash dividend of 25 cents per share payable on
May 27th, 2004 to shareholders on record as of May 13th.

Picked on March 30 at $ 80.88
Change since picked:   - 0.68
Earnings Date        03/16/04 (confirmed)
Average Daily Volume:     1.0 million
Chart =


---

Lexmark Intl. - LXK - close: 91.75 change: -0.25 stop: 89.50*new*

After rising more than $10 from its early March lows, it appears
the air may be getting a bit thin for the bulls.  Yesterday's
consolidation above the $91 level looked encouraging and today's
surge up to the $93 level looked outstanding until the stock gave
it all back to end with a fractional loss for the day.  It is
conceivable that LXK will consolidate a bit more near current
levels and then make another bullish run towards our $95 target.
It's also possible that the bulls have run out of gas.  Until the
chart provides more clarity, we're inclined to be a bit more
conservative.  We're tightening our stop to $89.50 tonight, just
under the 10-dma ($89.93).  A dip and rebound from the vicinity
of the 10-dma can be used for new entries, but with the proximity
of our profit target, we're not in favor of fresh breakout
entries.

Picked on March 14th at      $85.77
Change since picked:          +5.98
Earnings Date               4/19/04 (unconfirmed)
Average Daily Volume =     1.02 mln
Chart =


---

MGM Mirage - MGG - close: 46.18 change: +0.84 stop: 43.25

More good news for MGG traders.  We did get the dip as expected
and support at the 10 & 21-dma's held tight.  Yesterday's low was
$44.75 and the stock didn't trade under $45 for very long.  Today
investors bought the dip and sent MGG to another new all-time
closing high.  If you missed the dip new positions at current
levels still look good but you might want to consider a tighter
stop loss.

Picked on March 25 at $ 45.69
Change since picked:   + 0.49
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     597 thousand
Chart =


---

Newmont Mining - NEM - close: 46.75 change: +0.12 stop:
43.50*new*

The Dollar index took another hit on Thursday and the XAU index
inched a bit higher, and our NEM play managed to hold near its
highs from earlier in the week.  We've got our solid breakout
over $46 in place, the initial gap has been filled and all
systems are go for a rally up to the $50 area.  We're just
waiting for the catalyst.  Perhaps it will arrive tomorrow
morning with the Jobs report and perhaps it will take one more
dip to support near $45 before the move gets going in earnest.
Optimal entries will be found on that pullback as the stock
bounces once again.  Breakout entries over $47.50 can be used by
more aggressive traders, but the risk-reward is not as favorable
with strong resistance looming at $50.  We'll nudge our stop up
to $43.50 tonight, just under the 50-dma ($43.52).

Picked on March 28th at      $46.15
Change since picked:          +0.60
Earnings Date                2/04/04 (confirmed)
Average Daily Volume =     6.38 mln
Chart =


---

National Semi. - NSM - cls: 45.46 chng: +1.03 stop: 41.00*new*

Delivering on the relative strength we thought we saw earlier in
the week, NSM blasted sharply higher on Thursday, breaking out
over the $45 level and hitting our entry trigger at $45.40 in the
afternoon session.  The stock's strength (+2.3%) relative to the
overall Semiconductor sector (SOX.X) was that more impressive due
to the strong volume backing the move.  Despite the fact that NSM
is trading at new multi-year highs, the SOX is still pinned below
strong resistance in the $495-500 area.  Aggressive traders can
now enter on a push through today's high, while the more
conservative approach will be to target entries on a slight
pullback near the $43-44 level, which should now offer solid
support.  Continuation above the $46 level will have the stock
well on its way towards our $50 target.  Look for renewed
strength from the SOX to help propel NSM along its way.  Note
that we've raised our stop to $41 tonight, just under the 20-dma
($41.07).

Picked on March 30th at      $44.43
Change since picked:          +1.03
Earnings Date                5/25/04 (unconfirmed)
Average Daily Volume =     3.97 mln
Chart =



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

eBay Inc - EBAY - close: 72.25 change: +2.97 stop: 67.00

Company Description:
eBay is The World's Online Marketplace(TM). Founded in 1995, eBay
created a powerful platform for the sale of goods and services by
a passionate community of individuals and businesses. On any
given day, there are millions of items across thousands of
categories for sale on eBay. eBay enables trade on a local,
national and international basis with customized sites in markets
around the world. (source: company press release)

Why We Like It:
We've been waiting and watching for a strong move in EBAY over
resistance at $70.00 for weeks.  Positive comments from Bear
Stearns, who raised their earnings estimates on EBAY's Q1,
sparked a rally that didn't stop until it had cleared March's
earlier high at $72.00.  Volume was almost double the average,
which suggests this move is for real this time.  The rally today
also produced a new bullish buy signal on its MACD oscillator.

We feel that EBAY should be able to make a decent earnings run
with their announcement just three weeks away on April 21st.  As
an end of day newsletter we're going to open the play at current
levels but we suggest traders look for a dip back toward the
$70.00 mark to initiate bullish positions.  We're going to start
the play with a stop loss at $67.00 even though we believe the
$70 level should now act as support.

Suggested Options:
EBAY's earnings are the 21st of April and we don't plan to hold
over the event.  However, April options expire on the 16th.  So
we're going to suggest May calls.  Our favorite is the May 70s.

BUY CALL MAY 70 XBA-EN OI= 2914 at $4.80 SL=2.40
BUY CALL MAY 75 XBA-EO OI= 2806 at $2.30 SL=1.15

Annotated chart:



Picked on April 01 at $ 72.25
Change since picked:   + 0.00
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     7.0 million
Chart =



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PLAY UPDATES - PUTS
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UTStarcom, Inc. - UTSI - close: 29.22 change: +0.47 stop: 32.25

Satisfying our entry trigger on its first day in play, UTSI edged
below the $29 level and closed at its low of the day yesterday.
But the stubborn bulls just wouldn't let the stock fall, and it
managed a slight rebound on Thursday, ending just above $29.
Traders that eschewed entry on yesterday's breakdown may now get
their shot at a higher entry point if the bulls can put in a
credible bounce.  If that bounce materializes, look for a
rollover from the 20-dma ($30.86) to provide entry.  On the other
hand, a continued breakdown under yesterday's low can be used for
momentum entries.  Recall that there's the potential for mild
near-term support near $28 and then again at $26.  The 30-dma
($31.66) should continue to offer strong resistance, so our
$32.25 stop still seems sensible.

Picked on March 30th at       $29.38
Change since picked:           -0.16
Earnings Date                4/27/04 (unconfirmed)
Average Daily Volume =      3.48 mln
Chart =



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

Amerada Hess Corp. - AHC - close: 63.15 change: -2.13 stop: 66.00

Company Description:
Amerada Hess Corporation explores for, produces, purchases,
transports and sells crude oil and natural gas.  These
exploration and production activities take place in the United
States, United Kingdom, Norway, Denmark, Equatorial Guinea,
Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Malaysia,
Colombia and other countries.  The company also manufactures,
purchases, transports, trades and markets refined petroleum and
other energy products.  It owns 50% of a refinery joint venture
in the United States Virgin Islands, as well as another refining
facility, terminals and retail gasoline stations located on the
east coast of the United States.

Why we like it:
With talk of OPEC production cuts, Oil stocks have continued to
hold the majority of their gains in recent weeks and AHC has had
the appearance of a stock consolidating for another push higher.
But last night's credit downgrade from Standard & Poors sent the
stock plummeting today.  The ratings firm lowered their credit
rating for AHC to one notch above junk, citing the company's
relatively high costs and its struggles to find new sources of
oil and gas.  AHC slid more than 3.25% on Thursday, and appears
likely to test the 50-dma, perhaps as early as tomorrow.  The
hint that perhaps there were problems brewing can be seen on the
PnF chart, which had already given a Sell signal with a price
objective of $56.  Today's slide makes that objective suddenly
look plausible.

Before really turning bearish though, AHC will need to break its
50-dma ($61.95), so we're setting our entry trigger at $61.75.
Entries look favorable on that initial breakdown, but with
potential support near the $61 level, more conservative traders
may want to look for a subsequent failed rebound below $63.50
before entering the play.  Alternatively, aggressive traders can
wait for a break of $61 before entry.  Below $61, there's little
in the way of recent support until the stock reaches the $58
level and then key support will be found at $56, just under the
100-dma ($56.73).  That makes our target of $56 looks quite
reasonable.  We'll set our stop initially at $66, which is
comfortably above the most recent reaction high at $65.49.

Suggested Options:
Aggressive short-term traders will want to use the April 65 Put.
Those with a more conservative approach will want to use the May
65 put.  Aggressive traders looking for more insulation against
time decay can use the May 60 strike.  Our preferred option is
the May 65 strike, as it is currently in the money and should
provide ample time for the play to move in our favor.

BUY PUT APR-65 AHC-PM OI= 689 at $2.50 SL=1.25
BUY PUT MAY-65*AHC-QM OI= 265 at $3.50 SL=1.75
BUY PUT MAY-60 AHC-QL OI=1326 at $1.20 SL=0.60

Annotated Chart of AHC:



Picked on April 1st at        $63.15
Change since picked:           +0.00
Earnings Date                4/28/04 (unconfirmed)
Average Daily Volume =         870 K
Chart =



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The Option Investor Newsletter                  Thursday 04-01-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Chips, Healthcare, Tobacco, Biotech
Option Spreads: CPTI Students Keep Pocketing Profits
Traders Corner: Fun With Fibonacci


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

Chips, Healthcare, Tobacco, Biotech

___________________________________________________________________

How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.
___________________________________________________________________


Micron Technology - MU - close: 16.90 change: +0.19

WHAT TO WATCH: The semiconductor sector was one of the markets
best performers today with a 1.68% rally up and over resistance
at the 490 level.  This helped lift MU toward its recent highs
and resistance at $17.00.  If the SOX can continue to push
higher, specifically through resistance at its 50-dma, then we'd
expect MU to follow.  Bulls could use a trigger over today's high
near $17.10 and target a move toward the $20.00 level.  MU's P&F
chart is more bullish and points to a $22 price target.
Alternatively if the chips pull back then we can watch MU for a
pull back to the $16.50-16.00 range and look for a bounce.

Chart=


---

Anthem Inc - ATH - close: 91.20 change: +0.56

WHAT TO WATCH: Steady as she goes... Shares of ATH have been
methodically plodding higher, hitting resistance levels,
consolidating gains and breaking out again.  Thursday marked a
new all-time closing high for the stock and confirmation of its
breakout above resistance at $90.00.  This may be an entry point
for a run toward the $100 level.  Meanwhile, its P&F chart has
produced a new bullish buy signal and its vertical count points
to a $110 price target.

Chart=


---

Altria Group - MO - close: 55.10 change: +0.65

WHAT TO WATCH: MO is on the move again.  After breaking down a
couple of weeks ago due to heightened litigation concerns the
stock has risen back above resistance at $55.00.  Now bulls just
need to see the stock breakout above its simple 50-dma and the
stock would be cleared for a run toward its highs near $59.00.

Chart=


---

ImClone Systems - IMCL - close: 53.00 change: +2.25

WHAT TO WATCH: The rumor crowd was pretty busy with IMCL today.
The stock recently broke out above resistance at the $50.00 level
and produced a very impressive bullish breakout on its P&F chart.
However, what really got the stock moving today was rumors that
IMCL was once again a takeover candidate and/or that there was
positive clinical trials news that may hit soon.  The stock ended
well off its highs but we'd watch it for a bounce from the $50.00
mark.  It might be a bullish entry point for a run toward the $60
level.

Chart=



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

CPTI Students Keep Pocketing Profits
By Mike Parnos, Investing With Attitude

Just wanted to take a minute to say that I’m gratified every time
I receive an email from CPTI students who have profited from
successfully using one of our strategies.   Keep them coming.

Our April positions are looking quite good – so far.  Still a long
way to go.  Time is on our side.  The market will bounce around,
stay in our range and we’ll all live happily after.

In the meantime, remember that the journey of a thousand miles
begins with a broken fan belt, a leaky tire or trying to make back
money lost on an emotional trade.  Plus, it’s always darkest
before the dawn.  So, if you’re going to steal the neighbor’s
newspaper, that’s the time to do it.
_________________________________________________________________

Mike, I entered the EOY OEX Iron Condor play earlier this month.
Got $1.15 for the Bull Put spread. Yesterday, I went back to the
beginning of CPTI articles and started reading.  Well I found your
column, 7/28/02, that said "if you can buy back a short option
with weeks remaining before expiration and retain 75% of the
profit, do it.”  Lots of benefits were enumerated.

So today I bought back my bull put spread for $.25.  That’s $1,350
Dead Presidents in my pocket and I’m grinning from ear to ear.

When I put it on, I was counting on Dow 10,000 holding and getting
a bounce into 3/31 end of month positioning and good first quarter
news.  For once it worked.  Now I’m sitting on my bear-call
spread.  The question is, do I have enough patience to sit on my
hands and let the premium tick out – or will the market continue
to move up and will it move ITM?  Anyway, I think I’m learning,
coach.  Thanks.  – Bill

Hi Bill,
Congratulations!  A good move closing the bull put spread on the
OEX Iron condor.  You can sit on your hands for a while.  If it
gets uncomfortable, maybe you can use some of your profits to hire
a 20-year-old cheerleader to sit on them for you.  At the very
least, it will take your mind off trading for a while.

Will the OEX move up past 570?  It’s possible, but the market has
run up a lot recently and we still have (at this writing) a 17-
point cushion.  Let’s allow the resistance to do its thing.  I
still feel comfortable with the position.  If you start to get
anxious, just wiggle your fingers.  I bet the cheerleader will
enjoy it.  You might too.
____________________________________________________________

Mike, I am not “new" to options trading, but in the not too
distant past I traded a lot of vertical spreads, many of them gone
bad.  These being short-term trades, I figured on closely tracking
the underlying stock as well as the values of the verticals.  I
found that often times the value of the verticals would just go
down precipitously often hitting my implicit stops, and a couple
of times I went into denial, just running the positions into the
ground.

Now I trade the more comfy and simpler calendars which are smaller
but more profitable trades for me.  In retrospect, during all
those intense moments watching the positions fade, and worrying
about each situation, I found myself understanding the stock
movement better than the options.  I actually bought the stock
sometimes and made profits (small ones, but who's complaining?) on
them after reading the options tealeaves!

Is something wrong with me?  Do I not understand how risk, stocks,
and verticals interrelate?  Did I forget to watch some crucial
tidbit of options info like IV or delta?  ?  I don't want to
entirely miss out on short-term volatile opportunities and would
like to restart trading verticals, but in smaller positions.  Can
you explain in your view what’s the matter with this picture, if
anything?  Thanks! -- Dan

Hi Dan,
We all have rough streaks -- directional traders more than others.
While some traders prefer directional trading, it’s not the path
that puts the percentages in your favor. If you're using vertical
spreads, it means you're picking a direction.  You're risking less
by making it a vertical spread, but you're still picking a
direction.   That's a tough way to go.

Calendar spreads at least give you a little more time for the
underlying to go in your direction.  But, the bottom line is that
it is still a directional trade.  If you must trade direction, the
calendar spread is the most sensible.

Also, keep in mind that the retail trader (that’s most of us) is
WRONG most of the time.  So, option buyers and directional traders
in general are fighting an uphill battle.  It's the disciplined
option sellers who have a much better chance of making consistent
money.

You sound like you may have an itchy trading finger.  Hopefully,
you’re not in it for the “action.”  Sometimes it's best to put on
Condors (and other premium selling strategies), sit back and let
time work FOR you -- instead of AGAINST you.

If you want to take advantage of short-term volatility (earnings,
FDA announcements, etc.), you could use a straddle.  I'll be
writing about a "low-risk" straddle soon.  It's a conservative
strategy that enables a trader to take advantage of market over-
reactions to announcements and other news related moves.

Buying stock is also a directional play with the maximum
exposure.  You’re not taking advantage of the leverage offered by
options.  Plus, even though buying options is risky, it’s less
risky than owning stock.  If you indeed can understand stock
movement, you're blessed.  The rest of us traders (the human
ones), the ones who want to be profitable, will have to be
satisfied with the more conservative (premium
selling) strategies.  Where do our profits come from?  The
directional traders.

______________________________________________________________

APRIL CPTI POSITIONS (From Thursday’s Column)

April Position #1 – SPX Iron Condor – 1132.17
We sold 4 SPX April 1075 puts and bought 4 SPX April 1050 puts for
credit of: $2.50 (x 4 contracts = $1,000).  Then we sold 10 SPX
April 1170 calls
And bought 10 SPX April 1180 calls for a 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 – 595.32
We sold 10 RUT April 530 puts and bought 10 RUT April 520 puts for
a credit of  $1.10.  Then sold 10 RUT April 610 calls and bought
10 RUT April 620 Calls for a credit of $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 - $105.35
Sold 10 XAU April 95 puts and bought 10 XAU April 90 puts for a
credit of  $.85 (x 10 contracts = $950).  Sold 10 XAU April 110
puts and bought 10 XAU April 115 puts for a credit of $.55 (x 10
contracts = $550).  Total net credit: $1.40.  Potential profit:
$1,400.  Maximum profit range $95 to $110.  Safety range: $93.60
to $111.40.
_____________________________________________________________

April Position #4 – OSX Calendar Spread Plus – $100.73
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.
Bought 10 OSX June $115 calls (36 delta) and sold 10 OSX April
$115 calls (23 delta) at a cost of  $2.15 ($2,150).

We also put on an April $100/$90 bull put spread and took in an
extra $.70 ($700) to reduce the cost basis to $1.45 ($1,450).
______________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $36.16
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:
Oct. $33 puts and Oct. $34 calls – credit of $1,900. Nov. $34 puts
and calls – credit of $1,150. Dec. $34 puts and calls – credit of
$1,500.  Jan. $34 puts and calls – credit of $850.  Feb. $34 calls
and $36 puts – credit of $750. Mar. $34 calls and $37 puts –
credit of $1,150. 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 – 553.64
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
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
investment.

Long Term: 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).
Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560
calls for $1.35.  A credit of $1.25 x 300 = $375.00.  Bought back
March 560 calls for $.15, locked in profit of $120 x 3 = $360.
Cash position is $3,320 ($1,620 plus the unused $1,700).

April Positions:
OEX Bull Put Spread - $544.31.  Sell 5 OEX April 515 puts and buy
5 contracts of April 505 puts for credit of  $.90 (x 5 contracts =
$450).
Sell calls against long 540 calls. Sell 5 OEX April 570 calls for
$1.35 (x 5 contracts = $675).
New cash position is $2,640 plus unused $1,700 = $4,340.
_____________________________________________________________

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, first look under "Education" on
the OI home page and click on "Traders Corner."  For more recent
columns, you can look under “Strategies” and click on
“Combinations.”  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
**************

Fun With Fibonacci
by Mark Phillips
mphillips@OptionInvestor.com

As I've begun to bury myself in the pursuit of building a viable
trading system, I've started out quite simply, as we've discussed
in some recent articles, originally focusing on a simple 50/200-
pma moving average crossover approach.  As detailed in my March
11th article, "Designing The System" I found that at first blush,
I wasn't overly thrilled with the results of this first stab at
something workable.  As I explained throughout that series of
articles, I wasn't trying to define a winning system.  I was
endeavoring to demonstrate the steps one has to go through in
order to design a system -- the latter being a much more useful
end result to self-directed traders.

Well, since that article, I had been playing with a bunch of
different things on a bunch of different charts until I had
numbers and indicators and moving averages and candles of every
shape and size dancing through my head, even when I closed my
eyes.  I call this cerebral saturation and those of you familiar
with the experience will immediately recognize its utility.  I
basically bombard my brain with more information and choices than
it can possibly absorb or process at once.  But there's this
little trick about the way the brain works.  You see, I managed to
cram all that information in there and those little neurons and
synapses went to work on their own, making connections and
associations that my cognitive brain was wholly incapable of.

So what does this have to do with designing a system or Mr.
Fibonacci?  I thought you'd never ask!  You see, I had been trying
all kinds of different settings for my oscillators and moving
averages, but it's a spectrum of infinite variability.  How do I
settle on a meaningful settings that are useful without
programming every one into the computer and letting it spit out
the results.  And then having to re-run the analysis for each
different symbol and fine-tune the settings to give the best
average fit to all the data?  No thanks -- that's just too
tedious.  Besides, I want something that I can point at and say
"That setting makes sense because..."

So anyways, that's where my mind was about a week ago and as I
stood in the shower a light bulb went on.  Actually, it was more
like an entire chandelier lighting up, because all these different
connections were being made that I had never thought of before.
Over the years, I've become a real fan of Fibonacci retracements,
finding that they really do carry great significance, sometimes
literally years after the initial retracement was drawn.  Anyone
who has studied the mathematical basis behind this form of
retracements understands that the reason it carries such great
significance is that the numbers and ratios show up literally
EVERYWHERE in nature.  Old Mr. Fibonacci didn't come up with these
numbers on a whim -- he found a mathematical way to represent what
he saw everywhere around them.

Equity markets are driven by a collection of humans, all of which
are driven by natural impulses and emotions.  So doesn't it make
perfect sense that we'd see a great deal of significance on the
Fibonacci retracements?  Of course!

Like I said, I had been looking at lots of charts with lots of
different oscillators with different settings and lots of
different moving averages, trying to see a pattern of which ones
carried the most weight over time.  I saw no clear pattern and was
becoming frustrated, because the settings I was playing with
seemed to have little basis in anything except that in this
instance or that instance they seemed to work.  Anyways, I was
standing in the shower and it occurred to me that some of the most
common moving averages in use are the 10, 20, 30 and 50-period.

This is where the first light bulb went on.  The mathematicians
and engineers already know where I'm going, but for the rest of
you, here's a quick primer.  The basis of all the ratios we use in
the Fibonacci retracements comes from the Fibonacci number series,
which starts with 0 and 1, with each successive number in the
series created by adding the prior two numbers together.  So the
overall series looks like this -- 0, 1, 1, 2, 3, 5, 8, 13, 21, 34,
55, 89, 144, 233, etc.  Throw out the zero and the first one and
the first four numbers in our series are 1, 2, 3 and 5.  Is it any
coincidence that each of those numbers are exactly 1/10 of those 4
common moving averages that we've all used for years, but without
really knowing why?  Well, maybe.  But what would happen if we
selected moving averages based directly on the numbers in the Fib
series?

That's right, as soon as I finished my shower I was back in front
of the computer, plugging in new numbers and settings to see what
interesting relationships might pop out of the woodwork.  First
let's look at the moving averages and then we'll move onto other
indicators later.  I think we can agree that any moving average of
5 periods or shorter is a bit too short.  So let's go with 8, 13,
21, 34, 55, 89, 144 and 233.

But before we proceed, let's touch on a couple of interesting
tidbits that I've run across over the years that tie in directly
with this little adventure.  Have you ever wondered where the VERY
common 21-day moving average comes from?  Why did that setting get
settled on and not 22?  Could it be that someone else went down
this very same experimental road in the past and empirically found
it to be a significant period?  Something else that I stumbled
across years ago and was recently reminded of by one of my readers
is a moving average crossover system that uses settings of 8 and
34.  Now wait a minute!  What are the odds of ending up with those
two Fibonacci numbers just by chance?  Why not 9 and 31?  Once
again, it seems like I am walking along a path that has been
walked more than a few times in the past by others seeking the
same sort of answers I'm pursuing.

The surest way to determine whether this idea has any validity is
to start slapping all these averages on a chart (let's start with
a 10-minute chart) for a given symbol.  For the sake of variety
and to demonstrate that we're symbol agnostic around here, I've
picked the Russell e-mini June Contract (MR04M).  That way maybe I
can keep the futures guys interested too!  Actually, I'm really
starting to like the MR e-mini contract, as it seems to trade in a
much less spiky manner than the YM, NQ and ES contracts.  But
that's a discussion best left for another time.

10-Minute Chart of the MR04M E-mini Contract With All Fib MAs



I haven't labeled all the moving averages on this first chart, but
hopefully you can connect the dots, with the fastest moving
average being the 8-pma and the slowest being the 233-pma.  The
first thing that ought to jump out at everyone is that there are
WAY too many moving averages on this chart.  The next observation
should be that there is far too narrow a span of time from which
to draw any conclusions.  But within those limitations, we can see
some significant points of inflection at the 89-pma (dark green),
the 55-pma (red) and the 34-pma (magenta).  So let's clean the
chart up, showing only the 34-pma, 55-pma and 89-pma and see what
we have.

10-Minute Chart of the MR04M E-mini Contract With 34, 55, 89-pmas



Note here that I've selected a different span of time.  Remember,
we're not trying to draw any conclusions yet.  We're just trying
to think outside of normal convention and see if there are any
intriguing observations we can make that we just might be able to
apply to our trading system development activities.  To that end,
we want maximum experimentation to prevent ourselves from slipping
into a rut and failing to see the forest for the trees.

As you can see, in this timeframe, we also have some points of
inflection NEAR the same moving averages, but I'm not overly
thrilled with the accuracy, especially on the big dip and
subsequent rebound late on 3/29.  So what can we do to clean that
up?  We could change the period of the moving average until we get
it to match the extent of that dip, but that's just curve-fitting
the data with the only consideration being to make the bounces in
this time frame look pretty.  But there's no rhyme or reason to
that modification, right?  Sticking with our theme of putting Mr.
Fibonacci's smarts to work for us, what happens if we let his
little series of numbers dictate our chart timeframe as well?

13-Minute Chart of the MR04M E-mini Contract With 34, 55, 89-pmas



Alright, how about looking at that 8-pma and 34-pma crossover
system that I made mention of above.  Let's take a quick look and
see if there just might be some merit to that approach.  Just for
grins, I'll add my own little wrinkle in the form of a Stochastics
oscillator with -- you guessed it -- Fibonacci settings.

13-Minute Chart of MR04M With 8 and 34-pmas With Stochastics



I won't draw any conclusions from this last chart, but I will say
it looks like there might be something to it.  This is just
another step along the way to discovering some ideas that MIGHT
work within a trading system.  Once we've identified a bunch of
these ideas, we can program them into a computer to do some
rigorous backtesting and start seeing which of them are capable of
being a part of a trading system.

Now I've left of a number of possible permutations here due to a
lack of time and space, but if you're thinking ahead, as I suspect
you are, you're already seeing where this concept of applying Mr.
Fibonacci to our chart setups can be expanded.  What happens if we
take all of those MAs shown on the first chart and apply them to
3-minute, 5-minute, 8-minute, 21-minute, 34-minute, etc. chart
timeframes?  I have played around with it to some degree and I
find it interesting that the price action and MAs converge on the
different timeframes.  What is interesting is that it is the
different MAs on different timeframes confirm one another so well.

As I've said numerous times in recent weeks, I'm not trying to
define the Holy Grail here.  This has been an exercise -- I hope
useful to many of you -- where I am trying to show how we need to
really think outside the box of convention when we're in the early
phase of system development.  All the parameters of brainstorming
apply here 1000%.  There is no idea too crazy to be considered.
We just have to evaluate each of them with a critical eye and only
keep the ones that are deserving of retention.  Remember,
experimentation is the quickest path to true knowledge and
understanding of any area of study.

Have Fun Exploring!

Mark


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