Option Investor

Daily Newsletter, Thursday, 04/15/2004

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The Option Investor Newsletter                Thursday 04-15-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Shrinking Refunds?
Futures Markets: See Note
Index Trader Wrap: Grabbing at straws
Market Sentiment: Waiting for the Weekend

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      04-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10397.46 + 19.50 10430.62 10322.16 1.91 bln 1586/1671
NASDAQ   2002.17 - 22.70  2031.84  1989.21 1.96 bln 1210/1992
S&P 100   552.47 +  0.59   554.69   548.38   Totals 2796/3863
S&P 500  1128.84 +  0.67  1134.08  1120.75
W5000   11024.00 +  1.10 11080.00 10948.04
SOX       488.76 - 14.40   504.15   483.40
RUS 2000  580.30 -  1.72   586.02   575.81
DJ TRANS 2913.94 +  4.60  2930.54  2893.11
VIX        15.74 +  0.12    16.78    15.22
VXO (VIX-O)16.24 -  0.42    17.24    16.10
VXN        22.83 +  1.24    22.97    21.53
Total Volume 4,268M
Total UpVol  1,477M
Total DnVol  2,742M
Total Adv  3180
Total Dcl  4163
52wk Highs  159
52wk Lows   187
NasTRIN    1.89
TRIN       0.96
PUT/CALL   0.84************************************************************

Shrinking Refunds?
by Jim Brown

If you have not done your taxes your time has run out. Or
you may have done the rough draft and found that your refund
was significantly less than you expected. That is what the
IRS pencil pushers announced today and the reason given was
the improving economy late in 2003. Apparently the stronger
than expected stock market increased income and taxes. The
average refund has risen only $102 compared to prior
estimates of +$300. This means the $350 billion tax cut
package may actually cost significantly less.

Dow Chart - Daily

Nasdaq Chart - Daily

SOX Chart - Daily

That news did not help the markets today as expiration week
volatility divided the indexes and produced several erratic
swings intraday. The Dow ended with a gain of only +19 but
the Nasdaq lost -22. The S&P closed flat and only +3 points
over the 1125 level where the most SPX options would expire
worthless. Good job by the market makers in holding the SPX
flat at that level over the last two days.

The economics today were mixed with Jobless Claims soaring
back over 350K to 360,000 and well above consensus estimates
in the 335K range. This was the biggest jump (+30K) in claims
since April 2003. This was not good news for the labor
watchers. If this trend continues this week the April jobs
report could be in trouble. The Jobs report numbers are taken
from a survey done this week. One week does not make a trend
but it definitely raised some eyebrows. Offsetting the jump
in claims was a drop in continuing claims to 2.98 million.
This was the first time under 3M since July-2001. Continuing
claims are impacted by workers running out of benefits as
well as those finding jobs. More than likely today's number
was the result of adjusting for seasonality and a shift
from winter to summer jobs. Should this trend continue
next week the market impact would be much greater. It would
however reduce the chance for an early rate hike.

The Job Openings and Labor Turnover report today showed
that hiring and firing through February were nearly unchanged
from January and opening up only +4.3% from the same period
last year. We have seen net positives in this report for
the last four months but the gains have been minimal. Since
this report was for February analysts hope the March jobs
number is a more accurate representation of the current

The really good news for the day came from the Philly Fed
Survey and the NY Empire Survey. The Philly Fed number rose
to 32.5 from 24.2 and a three month high. While the headline
numbers show continued promise several internal components
slipped further. Employment was flat and the average work
week dropped to 10.4 from 17.9 and the second monthly drop.
Back orders dropped back into negative territory at -2.5
for the first time in nine months. Prices paid rose and
prices received fell. Inventories spiked to 11.7 from -12.8.
Personally I think the internals paint a much more negative
picture but traders were generally encouraged.

The NY Empire Survey rose to 36.1 from 25.3 and continued
to present an improving outlook for the New York area. In
contrast to the Philly Fed the employment component doubled
as did the average workweek. Inventories dropped into the
negative column and backorders and new orders both rose.
This was a very strong report on the inside and suggests
the New York area rebound is gaining speed. Last month the
survey showed a significant drop from record high set in
January. This rebound proves the drop was just a statistical
hiccup in the trend.

Rounding out the economic calendar was the NAHB Housing
Index which jumped from 64 to 69 for April. All components
jumped except buyer traffic which remained flat. The rise
in mortgage rates this month could impact this report in
May but so far the homebuilders remain very optimistic
about the coming selling season. Hopefully the Fed will
hold off on any rate hikes until the fall and we get one
more strong summer in this sector. Building stocks were
mixed on this news.

It was a busy evening for earnings and there were some
mixed results. IBM reported inline and called future analyst
estimates "reasonable". Investors don't want reasonable they
want positive guidance. IBM said services orders were less
than analysts had expected and despite gaining some market
share they were cautious about the future. IBM's revenue
rose +11% for the quarter but if you take out the currency
translation from the weak dollar it would have only been a
+3% gain. As we all know the dollar has been rising for the
last week and will continue to rise as long as the Fed rate
hike threat is ahead. This is going to hamper results from
not only IBM but all major international corporations.

Once of the companies IBM is taking share from is SUNW
which announced earnings tonight or maybe I should say
losses. The company lost eight cents and slightly more
than analysts expected. SUNW warned recently so the loss
did not come as a shock. They are continuing to lay off
workers and fight the new server offerings from IBM and

Chip company earnings were represented by CREE +20 cents,
PMCS +6 cents, LEXR +11 cents (miss) and TMTA at -0.11.
PMCS had preannounced upgraded guidance and still posted
better than expected results. They raised guidance again
in the conference call. CREE beat estimates and raised
guidance on strength in its LED business. On the negative
side TMTA posted a loss on declining revenue and warned
that the loss could grow next quarter.

LEXR was the dog of the group. LEXR posted a small earnings
miss of a penny but warned that future earnings would be
rough. The company said "after several quarters of relatively
stable average selling prices, second quarter price declines
will be sizeable." According to the CEO the declines are
occurring sooner than anticipated due to excess supply in
the flash memory sector. While that is good news for chip
consumers it is bad news for chip makers. SNDK had already
taken a -$5 haircut this week after they also warned that
revenue would drop substantially.

Another sector that got hammered was the network storage
business. EMC results were less than hoped for and the
group took a nose dive on Thursday. After the bell McData
(MCDT) warned that revenue would be lighter than previously
expected. "This change in anticipated revenue reflects less
robust-than-expected early 2004 purchase patterns by end
users and customers, some of which may relate to a slower
pace of economic recovery and seasonal softness in IT
spending in the first quarter."

SEBL beat the street by a penny aided by strong cost
cutting efforts. While the news was good for the company
it was not greeted warmly. Investors would rather see
gains from increasing revenue instead of cost cutting.

The futures fell after the close on the earnings news and
on the warning from Colin Powell for all non essential
personnel to leave Saudi Arabia. According to the press
release the threat level has shot up with escalating
events building up to a potentially devastating attack
in the future. While this is in Saudi it is not the kind
of news that leads to rallies. There was a new Bin Laden
tape today with the requisite warning to America and its
allies. Investors realize it is only a matter of time
until we are hit again in the US and each escalation
brings it closer to home.

The markets are faced with more warnings and earnings
misses this week than we have seen in some time, the terror
threat is increasing and the election is a toss up. These
problems are converging with the normal start of the summer
doldrums. Institutions are starting to get nervous and there
are a surprising number of references to the crash of 1987.
We get these whenever the chart patterns match up and the
current match is scary. While I do not subscribe to this
theory for various reasons the concerns are making the
rounds. Rumors, however untrue, still cause concerns that
a repeat could happen.

Dow Comparison Charts 1987-2004

For today the Dow completed its second day of testing support
on the 100dma at 10350. After Tuesday's drop we have traded
in a range between 10415-10325 and the outlook is not positive.
We appear to be setting up for a test of the March low of
10000. With the general earnings trend already established
there is not a lot of expectations left unfulfilled. Most
are reporting slightly higher numbers with inline guidance.
I can't wait for the next First Call update to see if the
forecast for the quarter has slipped.

The Nasdaq was the weakest link today as the tech news has
been less than exciting. We broke 2000 intraday and barely
recovered to close back over that level. The expectations
and hopes that took traders to 2075 last Thursday has left
the building and several more results like IBM, SUNW, LEXR
and MCDT will pull the rug out from under Nasdaq 2000.

How much of this weakness and volatility is related to
options expiration on Friday remains to be seen. We may
not be able to tell from Friday's trading as we could see
stronger event risk flight tomorrow than last Friday.
The bloom is off the rose and traders could be thinking of
moving to safety rather than trying to squeeze another point
out of the week. There are no material earnings out in the
morning other than ET and NOK. Nokia has already warned so
no tech help from that announcement.

I suggested on Tuesday that traders wait until next week
to enter new positions and let the uncertainty from earnings
and expiration volatility dissipate. I am still leaning in
that direction. If we close down on Friday and nothing
happens over the weekend then we could get an oversold
bounce on Monday. We will know then how the fund flows
came in for this week and the drain for tax payments will
be over. There is always another day in the markets and
waiting patiently never lost anybody any money.

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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Grabbing at straws

The U.S. government's tax instructions may seem perplexing to
some and while I'm not a tax code expert, perhaps you too might
feel like you have a better grasp of the current tax code, than
what has been taking place of late, where trader's whims shift on
an hourly basis, if not every 24-hours.

Investors were grabbing at straws again today, this time piling
into drug and energy stocks, while trading out of technology, in
what begins to look like one of those trades where money rotates
quickly and with some rate of urgency, as if trying to dodge a
silver bullet called Fed tightening.

Market Snapshot / Internals - 04/15/04 Close

The Disk Drive Index (DDX.X) 123.48 -3.33% and Semiconductor
Index (SOX.X) 488.76 -2.85% led the decline for the tech-heavy
NASDAQ, where the SOX's decline and close back below 500 was
striking in the face of a batch of better than expected earnings
reports from the likes of Advanced Micro Devices (NYSE:AMD)
$16.22 -5.25%, Cypress Semiconductor (NYSE:CY) $17.75 -12.77%,
Farichiled Semiconductor (NYSE:FCS) $23.60 -6.94% and Lam
Research (NSDAQ:LRCX) $25.33 -5.55%.

SOX component Teradyne (NYSE:TER) $23.45 -5.74% didn't say
anything, but when Banc of America said TER was one of its least-
favorite names in the semiconductors, bulls seemed as eager to
sell TER as tax-filers would be to claim their pets as dependents
if they thought they could get away with it.

Teradyne (TER) is scheduled to release its quarterly results on
Tuesday (04/20/04), where consensus looks for the company to have
earned $0.15 per share versus year-ago quarter's loss of $0.26
per share.

The Dow Industrials (INDU) 10,397.46 +0.18% carved out a 20-point
gain, where drug components Johnson & Johnson (NYSE:JNJ) 54.52
+3.65%, Merck (NYSE:MRK) $46.98 +3.38% and recently added Pfizer
(NYSE:PFE) $37.34 +4.27% offset losses in Intel (NASDAQ:INTC)
$26.66 -2.59% and Citigroup (NYSE:C) $49.92 -2.02%.

Pivot Matrix -

I decided to go back to the squaring of correlative
support/resistance levels in the matrix as it is a bit easier to
get a snapshot glance of potential support/resistance levels.
The bulk of trade centers around the MONTHLY Pivots, where only
the Dow Industrials and S&P 100 Index hold above their WEEKLY S2.

After faltering to a session low of 330, the S&P Banks Index
(BIX.X) 332.84 -0.28% regained some composure in the final 90-
minutes of trade to finish down fractionally.  BIX.X breadth was
negative at 16:5, with National City (NYSE:NCC) $33.50 +1.20% the
lone 1% or more gainer, while Bank of New York (NYSE:BK) $30.70
-1.91%, Union Planters (NYSE:UPC) $27.62 -1.7%, Fifth Third
Bancorp (NASDAQ:FITB) $53.47 -1.63% and several other components
remained under pressure.

Market Monitor - After the close earnings

As I went through some of tonight's after-hours trade for those
company's that posted their quarterly earnings, it was up, down,
up, down, up, down results.  IBM (NYSE:IBM) $93.97 fell to
$91.35, Avid Tech. (NASDAQ:AVID) $45.56 -1.66% rose to $46.88 as
did Cree, Inc. (NASDAQ:CREE) $21.60 -0.73%, which jumped $1 to
$22.60.  Lexr Media (NASDAQ:LEXR) $15.45 -9.38%, which had gained
just over 30% in the past month, plunged to $12.20, while Sun
Microsystems (NASDAQ:SUNW) $4.43 -2.85% edged lower to $4.32.

Pharmaceutical HOLDRs (AMEX:PPH) - Weekly Intervals

Drug stocks were today's sector winner and a look at the
Pharmaceutical HOLDRs (AMEX:PPH) $81.11 +3.36% with volume turned
on shows that today's 2.3 million shares would be more than
double this week's current volume total, which to me suggests
there was some conviction among buyers in this group.  The
biggest risk I currently see for this group is this year's
election.  If you know Senator Kerry is going to win, then avoid.
Another 4-years of President Bush would be viewed as more

After some massive gains in the HMO Index (HMO.X) 929.95 -3.55%,
many traders said there was noticeable rotation out of HMO's on
profit taking, but still staying in a more defensive healthcare
group and drugs.

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

Several index option traders that have taken some heat in SPX put
options sent e-mail today if it would be best to close out those
options at current levels.  My general answer, based on thought
they were not April puts, would be to do nothing at this point.
Oscillators are of little help at this point as MACD begins to
roll and a break below 1,120 could have momentum building to the
downside, where based on this week's trade, the weekly pivot
would move lower, and who knows for sure, but a "summer doldrums"
range from 1,088 to 1,150 could develop.

I will admit that with money moving to one sector one day, then
another the next, it does seem like the indices become somewhat
of a "zero sum" game right now.

Dow Industrials (INDU) Chart - Daily Intervals

IBM is the second-largest price-weighted component in the INDU,
and while IBM's earnings were largely inline with consensus
estimates, cautious comments did find some weakness in after-
hours trade.  Tech components were generally weak, but it was the
drug components, which made some rather impressive one-day moves
that helped hold the INDU above the 10,350 level by the close.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

After being stopped out of two separate shorts in the QQQ near
$37.11 with a downside target for the QQQ to fill its gap, I've
developed distaste for the QQQ.

As I've looked at many of the QQQ components, for the most part,
I see little conviction among bulls or bears (buyers/seller)
where I can really develop a solid feel for where
support/resistance will be firm.  However, at current levels,
this is where I do think a trader moves to the sidelines.

Jeff Bailey


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Waiting for the Weekend
- J. Brown

The markets didn't do much on Thursday as investors still
grappled with rising geo-political tensions and interest rate
concerns, warranted or not.  The strong earnings reports from
TXN, AAPL and AMD on Wednesday night failed to inspire any buying
save for a spike in shares of AAPL itself.  Investors got another
chance to buy the strong economic news when the Philly Fed survey
and the NY Empire State index came out today.  Both were strong
but again the markets shrugged them off.  Overall it seems like
investors are erring on the side of caution.  We even saw some
heavy buying in drug stocks.  This group was lead by a strong
rise in Pfizer after a Deutsche bank analyst mentioned it as the
best buy in the group but the rally was sector wide.  Normally
drugs are seen as a traditional "safe haven" play when investors
worry about stocks turning south.

Earnings have been generally good but guidance was somewhat
lackluster. IBM's report tonight was a prime example.  Add the
few earnings misses and suddenly investors aren't so eager to
push stocks higher on earnings news alone.  Be cautious and watch
those stop losses.


Market Averages


52-week High: 10753
52-week Low :  8337
Current     : 10397

Moving Averages:

 10-dma: 10456
 50-dma: 10448
200-dma:  9904

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  877
Current     : 1128

Moving Averages:

 10-dma: 1138
 50-dma: 1133
200-dma: 1066

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1039
Current     : 1459

Moving Averages:

 10-dma: 1481
 50-dma: 1458
200-dma: 1399


The volatility indices didn't do much, which was par for the
course given the action in the major indices today.

CBOE Market Volatility Index (VIX) = 15.74 +0.12
CBOE Mkt Volatility old VIX  (VXO) = 16.24 -0.42
Nasdaq Volatility Index (VXN)      = 22.83 +1.24


          Put/Call Ratio  Call Volume   Put Volume

Total          0.84      1,005,497       846,617
Equity Only    0.67        757,064       506,667
OEX            0.90         57,206        51,248
QQQ            3.73         30,536       113,948


Bullish Percent Data

           Current   Change   Status
NYSE          73.8    - 3     Bull Correction
NASDAQ-100    54.0    + 0     Bear Correction
Dow Indust.   90.0    + 0     Bear Correction
S&P 500       75.8    - 1     Bear Confirmed
S&P 100       79.0    + 0     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: 1.17
10-dma: 1.04
21-dma: 1.12
55-dma: 1.18

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    1419      1196
Decliners    1424      1941

New Highs      69        61
New Lows      100        24

Up Volume    906M      475M
Down Vol.    978M     1455M

Total Vol.  1895M     1945M
M = millions


Commitments Of Traders Report: 04/06/04

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

There isn't much change to report in the Commercial traders'
positions.  They remain net short of the large S&P futures
contracts.  Small traders are virtually unchanged as well.

Commercials   Long      Short      Net     % Of OI
03/16/04      454,635   449,505     5,130     0.6%
03/23/04      401,456   418,732   (17,273)   (2.1%)
03/30/04      407,987   420,624   (12,673)   (1.5%)
04/06/04      409,429   419,471   (10,042)   (1.2%)

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
03/16/04      159,054   115,023    44,031    25.3%
03/23/04      130,648    89,943    40,705    18.5%
03/30/04      130,112    81,937    48,175    22.7%
04/06/04      130,262    80,174    50,088    23.8%

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

The S&P e-minis are seeing a bit more action with commercials
increasing their short by 20K.  In contrast the small trader
has upped their longs, which is par for the course.

Commercials   Long      Short      Net     % Of OI
03/16/04      472,809   574,241   (101,432)  ( 9.7%)
03/23/04      268,647   294,930    (26,283)  ( 4.7%)
03/30/04      265,492   305,797    (40,305)  ( 7.1%)
04/06/04      270,904   328,862    (57,958)  ( 9.7%)

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
03/16/04     192,136     96,691    95,445    33.0%
03/23/04     131,879     59,210    72,669    38.0%
03/30/04     123,494     59,550    63,944    35.0%
04/06/04     148,737     46,235   102,502    52.6%

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


Hmm.... commercial traders have erased the one-week surge in
short contracts flipping them back to net long for the NASDAQ.
Meanwhile small traders are reducing longs and upping their

Commercials   Long      Short      Net     % of OI
03/16/04       68,285     54,899    13,386   10.9%
03/23/04       52,014     34,017    17,997   20.9%
03/30/04       52,749     67,967   (15,218) (12.6%)
04/06/04       54,862     34,762    20,100   22.4%

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
03/16/04       27,859    18,333     9,526    20.6%
03/23/04        9,884    12,887    (3,003)  (13.2%)
03/30/04        8,928    16,551    (7,623)  (30.0%)
04/06/04        7,971    20,721   (12,750)  (44.4%)

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


Very little change in commercial traders' positions for the
Dow futures.  Small traders have turned a bit more negative.

Commercials   Long      Short      Net     % of OI
03/16/04       32,317    17,514   14,803      29.7%
03/23/04       23,048    22,119      929       2.1%
03/30/04       23,642    22,180    1,462       3.2%
04/06/04       23,101    22,108      993       2.2%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
03/16/04       10,002    20,970  (10,968)   (35.4%)
03/23/04        8,344     6,734    1,610     10.7%
03/30/04        7,020     6,711      309      2.3%
04/06/04        7,316     8,085     (769)    (5.0%)

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 04-15-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: NSM, TK
Dropped Puts: CFC
Call Play Updates: CAT, EBAY, ESRX, PDCO, ZBRA
New Calls Plays: WFMI
Put Play Updates: LEH, PD, QLGC, UTSI
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.


National Semi. - NSM - cls: 44.90 chng: -2.07 stop: 46.25

Well, that was painful!  After running as high as the $48.60
level while outperforming the SOX, NSM got slammed lower on
Thursday, losing 4.4% and playing catchup with the SOX on the
downside.  This is precisely why we tightened our stop to just
below near support earlier in the week, so that we wouldn't risk
giving back all our gains if the stock's strength were to fade.
Needless to say, our stop was hit early this morning and with the
strong selling volume today, it looks like NSM has more room to
fall, possibly all the way back to the 50-dma.  We'll log our
drop as of tonight's close and suggest that traders that didn't
exit on today's weakness should take advantage of any hint of a
bounce to do so.

Picked on March 30th at      $44.43
Change since picked:          +0.47
Earnings Date                6/10/04 (unconfirmed)
Average Daily Volume =     4.19 mln
Chart =


Teekay Shipping - TK - close: 64.49 change: -0.31 stop: 65.95

Our Tuesday update said that if TK closed under its 50-dma and or
the $65 mark we'd probably close this play unopened.  Sure enough
TK has broken both levels of support.  We suspect that TK has
just gotten ahead of itself and needs to consolidate.  The
fundamentals for the company and the industry look pretty strong
given the world's demand for oil and the industry demands for
double-hulled tankers.  Watch for TK to announce earnings on
April 21st.

Picked on April xx at $ xx.xx <-- see trigger
Change since picked:   + 0.00
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     374 thousand
Chart =


Countrywide Financial - CFC - close: 56.37 chg: +0.92 stop: 58.51

Target achieved!  Our profit target was a move to $54.65 and CFC
exceeded this level with a low of $54.40 before lunchtime this
morning.  This grants traders a move of $4.35 from our entry
point at $59.00 (split adjusted).  It's no coincidence that CFC
bounced strongly into the close.  Not only is the stock strongly
oversold but the $54.50 level is support.  Today's candlestick is
a "hammer" and at the bottom of a trend like this it looks like a
bullish reversal.  Obviously we need to see some confirmation but
you can bet that bullish speculators will be watching CFC for any
signs of strength.

Picked on April 06 at $ 59.00 (split adjusted)
Change since picked:   - 2.63
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     2.5 million
Chart =


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Caterpillar - CAT - close: 80.80 change: -0.23 stop: 79.99

We have a week left to go before CAT's April 22nd earnings report
and the current environment doesn't seem very conducive to new
bullish positions.  CAT has pulled back toward support at the
$80.00 level, which is currently holding but like the Dow
Industrials CAT's MACD indicator is about to produce a new sell
signal.  We would be cautious about initiating new positions and
diligent on maintaining stop losses.  There was a headline on
Wednesday where CAT shareholders voted down a measure to force
the company to re-evaluate their sales to Israel.  The issue was
raised because the Israeli army has used CAT's bulldozers while
clearing empty Palestinian homes from the areas in dispute.  It
doesn't seem fair to hold CAT responsible for what their
customers do with their equipment and CAT shareholders agreed.

Picked on April 02 at $ 80.25
Change since picked:   + 0.55
Earnings Date        04/22/04 (confirmed)
Average Daily Volume:     2.5 million
Chart =


eBay Inc - EBAY - close: 75.36 change: +0.30 stop: 72.95 *new*

We don't have much time left for our EBAY play.  The company is
due to report earnings on Wednesday, April 21st after the closing
bell and that doesn't give EBAY much time to finish the earnings
run we were hoping for.  We are encouraged that the stock bounced
from its rising 10-dma but the weakness in the NASDAQ and
Internet sector seemed to hold it back on Thursday.  We are not
suggesting new bullish positions at this time and are raising the
stop loss to $72.95.  More conservative investors might want to
use Wednesday's low as a potential stop loss.

Picked on April 01 at $ 72.25
Change since picked:   + 3.11
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     7.0 million
Chart =


Express Scripts - ESRX - close: 75.98 change: -0.37 stop: 74.00

Was that an entry point?  With all the expiration week gyrations,
it's tough to call, especially with the flurry of earnings news
that is driving individual stocks sharply higher and lower.  But
ESRX has been largely immune to the action in the broad market,
gradually falling back to test broken resistance in the $75-76
area.  This morning's brief dip near the $75 level looked like an
entry, as the stock rebounded off of former resistance, right
between the 20-dma ($75.15) and 30-dma ($74.84).  The big concern
for our bullish play is that volume has been rising over the past
couple days, while price has been falling and that is normally a
bearish development.  But as long as the dominant bullish price
trend remains in effect, we'll continue to view dips to support
as viable entry points.  Note that there could be pressure on
Friday to pin the stock near $75 due to option expiration antics.

Picked on April 4th at       $75.36
Change since picked:          +0.62
Earnings Date                4/28/04 (unconfirmed)
Average Daily Volume =     1.03 mln
Chart =


Patterson Dental Co - PDCO - cls: 77.81 chg: +0.79 stop: 76.50*new*

Up, up and away!  Like superman PDCO has shrugged off the
market's weakness and forged ahead.  Wednesday's low was a
rebound off the rising 10-dma and it broke out over resistance at
$76 to hit a new all-time high.  The rally continued today with
volume stronger than average on the two-day surge higher.  Our
original play description suggested traders exit if PDCO traded
into the $77.50-80.00 range.  We mentioned on the MarketMonitor
this morning that PDCO was in that exit range and traders should
be taking profits or planning to close the play soon while moving
up stops.  Due to PDCO's strength and intraday trend of higher
lows we're going to keep the play open and target the $79.95
mark.  This will be our official exit point and we'll close the
play if PDCO trades there.  Our new stop will be $76.50.

Picked on April 04 at $ 72.14
Change since picked:   + 5.67
Earnings Date        02/19/04 (confirmed)
Average Daily Volume:     493 thousand
Chart =


Zebra Technologies - ZBRA - cls: 71.61 chg: -1.89 stop: 69.99

Shares of ZBRA finally felt some profit taking today but the low
at $70.75 also happened to be a bounce from its 21 & 30-dma's.
We will admit that the MACD looks bearish and a bit discouraging.
Conservative traders might want to wait for ZBRA to trade back
above $73.50 before considering positions.  More aggressive types
can use this dip toward $70 as an entry point but watch out for
more weakness if the markets keep falling tomorrow.  We've only
got eight trading days before ZBRA reports earnings.

Picked on April 11 at $ 73.26
Change since picked:   - 1.65
Earnings Date        04/28/04 (unconfirmed)
Average Daily Volume:     332 thousand
Chart =


Whole Foods Market - WFMI - cls: 76.01 chng: +1.34 stop: 72.50

Company Description:
Whole Foods Market, Inc. owns and operates a chain of natural and
organic foods supermarkets in the United States.  As of September
28, 2003, it operated 145 stores in 26 states, the District of
Columbia and Canada.  Regional distribution centers, bakehouse
facilities, commissary kitchens, seafood processing facilities,
produce procurement centers and a coffee roasting operation
support the Company's stores.  WFMI's product selection has a
heavy emphasis on perishable foods designed to appeal to both
natural foods and gourmet shoppers.  Its product categories
include, but are not limited to, produce, seafood, grocery, meat
and poultry, bakery, prepared foods and catering, specialty
(beer, wine and cheese), whole body (nutritional supplements,
vitamins, body care and educational products such as books),
floral, pet products and household products.

Why we like it:
There's no doubt this has been a rough week on the bulls, so any
stock that has been able to sustain a bullish-looking trend is
deserving of our attention.  WFMI has pulled back in a very
healthy manner from its March highs near $79, and has been riding
its long term rising trendline for the past 2 weeks.  Throughout
that period, intraday resistance has been holding near the $76.25
level, but if it breaks, then we ought to see the stock squirt
higher to test those highs from last month.  Looking at the PnF
chart, we can see that the picture is not unabashedly bullish, as
the dip to $73 did generate a Sell signal with a target of $67.
But since it was only a one-box Sell signal, there's the distinct
possibility that it will turn out to be a bear trap.  While it
will take a trade back at $79 in order to give a new Buy signal,
the price pattern on the daily chart should allow for an entry at
a lower level in anticipation of that stronger bullish move.

We'll use a trigger at $76.50 to get over the recent intraday
resistance.  Note that a move above that level will also
constitute a breakout over the descending trendline that has been
building since the early March highs.  Aggressive traders can
enter on that initial breakout, looking for an initial move back
to the $79 area.  Once the stock touches $79 again, more
conservative traders will be able to consider entries, either on
a breakout to new highs or a mild pullback to confirm new support
near $76.  While $79 will clearly be a point of resistance, we're
looking for WFMI to break out to new highs ahead of its earnings
report in early May.  Initial stops should be placed at $72.50,
as that is just below the late March intraday low.

Suggested Options:
Shorter Term: The May $75 Call will offer short-term traders the
best return on an immediate move, as it is currently at the

Longer Term: Aggressive longer-term traders can use the May $80
Call, while the more conservative approach will be to use the
August strikes.  Our preferred option is the May $75 strike, as
it is currently at the money and should provide sufficient time
for the play to move in our favor.

BUY CALL MAY-75*FMQ-EO OI= 590 at $3.60 SL=1.75
BUY CALL MAY-80 FMQ-EP OI= 672 at $1.35 SL=0.75
BUY CALL AUG-75 FMQ-HO OI= 630 at $5.70 SL=3.50
BUY CALL AUG-80 FMQ-HP OI= 303 at $3.30 SL=1.75

Annotated Chart of WFMI:

Picked on April 15th at      $76.01
Change since picked:          +0.00
Earnings Date               5/05/04 (confirmed)
Average Daily Volume =        686 K
Chart =


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Lehman Brothers - LEH - cls: 77.49 chng: +1.05 stop: 80.00*new*

After a major drop on Tuesday in response to the heightened fears
over inflation and rising rates, shares of LEH were overdue for
an oversold rebound and it finally got underway today.  The stock
found some buying interest near the $76 level, resulting in a
solid gain by the end of the day, and a break over the $78 level
could mean a rally back to test the broken support near $80.
We've gotten a bit more aggressive with our stop tonight,
lowering it to $80, which is the breakeven level for the play.
While the 10-dma ($80.46) is above that level tonight, its rate
of descent will put it below that level at the open tomorrow,
helping to protect our new lower stop.  Traders unwilling to give
back that much of their gains may want to use a tighter stop just
over $78, which appears to be intraday resistance from the past
couple sessions.  Should LEH roll over below that level of
resistance, aggressive traders can use it as an opportunity for
continuation entries.  We're still targeting a drop to the $74
level, which is just under the 200-dma ($74.31).

Picked on April 6th at        $81.77
Change since picked:           -4.28
Earnings Date                3/16/04 (confirmed)
Average Daily Volume =      2.14 mln
Chart =


Phelps Dodge - PD - close: 73.55 chg: +0.62 stop: 77.51

PD traded mostly sideways on Thursday after Wednesday's gap down
below the $75 level.  It's not surprising to see the stock
consolidate some of its recent losses.  Nor would it surprise us
to see a small bounce higher but if PD traded above the $76.00
level we'd start to worry.  Fortunately, the simple 100-dma, now
at $76.50, should be new resistance.  Traders can actually use a
failed rally near $75 or $76 as a new entry point as we target
the $70.00 region but keep in mind this is a short-term play
ahead of PD's earnings report.  Remember, we don't plan to hold
over the announcement, especially PD's.  The rise in copper is
likely to produce strong results for the company.

Picked on April 13 at $ 75.15
Change since picked:   - 1.60
Earnings Date        04/28/04 (confirmed)
Average Daily Volume:     2.3 million
Chart =


QLogic Corp. - QLGC - close: 30.01 change: -0.88 stop: 33.00

The first day out of the gate saw our QLGC play desperately try
to hold onto the $31 level as last-ditch support, but the
continued weakness in the Semiconductor sector (SOX.X) was just
too much and the stock headed lower right from the opening bell
this morning, closing nearly a dollar lower and right on its low
of the day.  With the futures dropping after hours in response to
the day's earnings confessions, it looks like more weakness is in
store both for the SOX and QLGC ahead of the weekend.  We can now
expect solid resistance to be found in the $31.00-31.50 area, as
broken support becomes resistance, reinforced by the 10-dma (now
at $31.65).  A failed rebound in that area can be used for new
entries, as can a break below the $30 level.  We'll maintain our
stop at $33 for now, looking for a decisive break lower to give
us the green light to tighten the stop.  Note that the stock now
has a long ways to fall before finding first support near $25
enroute to our $20 target.

Picked on April 13th at       $31.00
Change since picked:           -0.99
Earnings Date                4/28/04 (confirmed)
Average Daily Volume =      4.72 mln
Chart =


UTStarcom, Inc. - UTSI - cls: 27.63 chng: -0.76 stop: 29.75*new*

On Tuesday, we defied UTSI to either break down or take out our
new, lower stop.  Fortunately, it decided to do the former,
falling precipitously over the past 2 days, pressured by the
weakness in the NASDAQ.  With more earnings-related weakness in
Tech land after hours, it looks like more downside is in store
for tomorrow as well.  There should now be strong resistance
found in the $28.50-29.00 area after the high-volume breakdown
below that former level of support over the past 2 days and any
bounce and rollover below that area can be used for new
aggressive entries.  Momentum traders can still enter on a break
below today's low, with our $24 target looking more likely by the
day.  Keep in mind there is still the potential for mild support
to be found near $26, so conservative traders may want to harvest
partial gains should a rebound commence from that level.  Note
that we're lowering our stop to $29.75 tonight, which is above
yesterday's intraday high, as well as the 10-dma ($29.43).

Picked on March 30th at       $29.38
Change since picked:           -1.75
Earnings Date                4/27/04 (unconfirmed)
Average Daily Volume =      3.22 mln
Chart =




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The Option Investor Newsletter                  Thursday 04-15-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: A Mixed Bag
Traders Corner: Building Trading Systems and the Use of Trendlines


A Mixed Bag


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.

Cabot Microelectronics - CCMP - close: 38.42 change: -2.48

WHAT TO WATCH: Surprise!  Strong earnings from chipmakers AMD and
TXN did little to help the semiconductor sector today.  CCMP's
reaction was to breakdown below significant support at the $40.00
level on strong volume.  We would strongly consider bearish
positions on this breakdown but earnings are next Thursday on
April 22nd.  Nimble traders might be able to play it.



Sherwin Williams - SHW - close: 38.66 change: +0.75

WHAT TO WATCH: Bulls can keep the eyes on SHW.  Rival PPG said
their earnings rose on strong paint sales so SHW could see a pre-
earnings run up ahead of its April 29th report.  Look for a
breakout over resistance at $39.00.  Currently SHW's point-and-
figure chart looks a little extended but points to a bullish $65
price target.



Prudential - PRU - close: 44.18 change: -0.41

WHAT TO WATCH: Broker-dealers have been getting hurt recently as
investors rotate out of financial-related stocks.  PRU has a nice
trend of lower highs but we'd look for a breakdown under support
at $44 and its 100-dma just under $44.  From there traders could
target a move toward the $40 level and its simple 200-dma.
Earnings are expected in early May.



Research In Motion - RIMM - close: 102.37 change: -0.38

WHAT TO WATCH: RIMM is actually holding up pretty well
considering it's still long-term overbought and the earnings news
is already out.  If you're bullish on the stock look for a bounce
from the $100 level (like today) but be careful.  The MACD is
about to produce a new sell signal and IBM's lackluster guidance
isn't going to do tech stocks any favors tomorrow.  If you're
bearish look for a breakdown below $100 but watch out for support
at its 50-dma near $95.50.



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Building Trading Systems and the Use of Trendlines
By Leigh Stevens

"Thanks for answering my last question. This was another one I

I thought I had a trading plan. After unsuccessfully trying to
daytrade the emini's using "discretionary" strategies (following
several different web sites), I came the conclusion that I'd
rather build my own system using TradeStation to back test it and
come up with something I had more confidence in because I would
have built it. Since I work fulltime, I planned on giving my son
(an engineering student) a summer job and let him tinker with
different variables I have in mind to see if we can come up with
something viable.

However, I was recently told by a professional builder of trading
software that I would essentially be wasting my time for several

1) Backtesting only a single index, stock, etc. is foolish because
historical performance is not predictive of future. That you
really need to do Inter-market analysis backtesting to really get
a system that will provide an edge. (The person I mentioned as
giving me this advice claims to have built a predictive software
that does this with an 80% accuracy, taking into account the
interrelationships between US Stock indexes, bonds, currencies,
foreign indexes, metals, etc.)

Based on this consideration, the task seems to be much bigger than
I bargained for, considering I would not have a clue how to do

2) Hearing how they spent 25 years developing their software,
using "artificial intelligence", "Neural Networks", "algorithms",
I suddenly feel like I'd be kidding myself trying to develop my
"own" feeble system which would not incorporate anywhere near this
type of sophistication.

I am tired of losing money to the big boys, or so called smart
money with much deeper pockets, so maybe this was good advice from
this person.

What do you think?"

I think that your original idea is right!

Number one - if someone has a system this good, I don't care what
rationale they give you as to why they are SELLING such a trading
system (e.g., they can generate more capital to trade with; they
want to share the "wealth", etc.), all professional traders I've
known ever would not.  They would only trade such a system(s)
themselves. I am talking about professional traders - those who
make their living from trading or investing.

It is well known that the more traders that enter the same orders,
the greater the likelihood that the increased order flow will make
the system less effective. Basically, there is no good reason,
other than to make money from selling the system, to take on
outside money to trade a system that is as good as described to

Number two - Even if you want to give this company some capital to
test out the actual results YOU get, continue to develop your own

A. The only way you will learn how to build trading systems is to
construct them, backtest the methods and then apply this to real
markets - whether this is in conjunction with someone else or not.

B. You will not learn from THEIR mistakes only from your own.
When they have to modify what they are doing because some aspect
of their system(s)stop producing profitable results, you will not
learn from what they do in this process. (Hopefully the profits
will increase however.)

You will learn from what YOU do however, by seeing where
modifications and changes (to your trading system) produce more
consistently profitable results, with less "drawdowns" (of trading
money) and so on.

Number three - I don't agree with the assumption that you can only
build really profitable systems by applying "Intermarket"
analysis.  Plenty of people have built profitable trading systems
by working with the stock index or index futures directly - by
devising trading rules, backtesting them and so on.

To use the example of TradeStation, they have seminars they
sponsor to teach the basic methods of building effective trading
systems - and, there are independent TradeStation User groups that
get together and share information and tips both in person and

The primary fallacy in the argument about intermarket analysis is
that the Indexes discount all other market influences constantly.
What is also going on in the bond or currency markets, with the
Fed, etc., that influences equities, is always being taking into
account with how an Index trades.

Historical data for an Index takes into account the impact of most
if not all external influences. Therefore, a good trading system
reflects an ability to profit from most everything that that moves
the market over historical periods. I don't know if I have
conveyed this concept effectively, but the idea given you reflects
an opinion only and not an objective fact.

Lastly - If you get the kind of returns over a year period that
they indicate they've gotten historically - and it IS true that
past results do not necessarily reflect future returns - let me
know about it.  Hey, I like to diversify too!

I use them all the time in my analysis as being very useful or key
to the study of trends and possible or likely trend reversals, but
I don't always discuss the basics of trendlines - how and why such
drawing techniques on charts are so useful.

A trendline is, as the name implies, a line that attempts to
measure and define the direction and limits of a price trend in
any market, such as in individual stocks or in stock indexes.
Such lines are either slope up or down to some degree in keeping
with the primary definition of a trend as meaning a predominant up
or down price direction. Lines that are drawn across highs and
lows made repeatedly in the same area, are known as "horizontal"

There is more than one way to construct trendlines.  I tend to be
a bit creative in the drawing of trendlines in that I will use a
type of construction that I call "best fit" analysis or is more
properly called "internal" trendlines.

The standard trendline technique - what we learn in charting 101,
is to draw an initial trendline through 2 or more (preferably a
minimum of 3 points) highest highs or lowest lows on a bar,
candlestick or line (close-only) chart. An internal trendline
draws a line through the MOST number of highs or lows however.

A rising up trendline is usually drawn by connecting 2 or more –
you can “start” with 2, but 3 is best - of the lowest lows. The
resulting line is then generally BELOW the level of the other
periodic price drops that occur in a rising market.

What really defines a rising up trendline is not the advancing
price moves or price swings, but the low point of the downswings,
dips or pullbacks on the way up.  You hear the adage to "buy dips"
or to buy weakness.  This generally refers to buying the
corrections in a rising trend which is usually buying pullbacks to
an up trendline.

Downside reactions in an uptrend will usually stop above, at or
near the rising up trendline.  Some illustrations will help at
this point -

This recent daily bar chart of the Nasdaq 100 Index shows the
initial low as point 1, a second low as point 2 and a third low as
number 3.  Note that the second low as slightly above the
trendline as drawn below.  The third low was a bit under the line.
What gives?

The second low (2) allowed me to draw an initial trendline that
had a slope slightly above the one shown above.  The third low (3)
caused me to do a "best fit" type trendline and simply split the
difference so to speak, by drawing the trendline in the
approximate midpoint between the two lows.  Notice how this then
defined or "contained" the reaction low of many months later at
point 4 - which was also quite close to the 200-day moving

Like all technical indicators and patterns that are defined by
drawing techniques, the more the merrier - here, when you had a
trendline intersecting close to support also implied by a key
moving average (i.e., the 200-day), this lends added weight to the
idea that the trendline will define the area where the next low
(and upside reversal) will come in.

Notice the upper red trendline in the chart above this is drawn
through 3 lows, then a forth - followed by a downside penetration
of that line - a "break" of the trendline a possible signal that
the trend was reversing from up to down.  When the NDX Index
rebounds to the area of this previously broken trendline, the
rally seems to stop right in this area. Well it's true folks!  In
technical analysis you hear the expression that price "support
(once broken)'becomes' (future) resistance" and vice versa -
"resistance 'becomes' support". This is true of trendlines as

Here, a return to this previously broken trendline will often mark
at least temporary resistance.  If I bought Index calls at the
lower trendline, I would take at least some profits at the upper
(previously broken) trendline. I have been known to use a phrase I
first heard from an analyst and trader named Michael Jenkins, that
such a trendline is the "kiss of death" trendline. I suppose a
return to a previously broken down trendline could be called the
"kiss of life" trendline as it will sometimes if not often mark a
support area.

Looking at the next chart below - that of the HOURLY Nas 100
Index, there are a couple of things illustrated here:

1. When a trendline is penetrated such as with down trendline "a",
the point of penetration sometimes is also where there is a major
jump (or fall in the case of an uptrend line), such as occurred on
overnight news where the Index jumped substantially higher the
next day, creating an upside chart "gap".

2. A second and third (or repeated) failure to penetrate a
trendline, such as trendline "b" above, often then suggests a
high-potential opportunity to go against the trend - in this case,
not only exiting calls have been suggested, but also purchasing
puts at the price intersection at the third (red) downside arrow,
showing the third try to get above the selling pressure coming in

A down trendline slopes down as it measures a declining price
trend and is typically drawn by connecting two or more, usually
three if available, of the highest highs of the periodic upswings
or rallies that occur in a downtrend.  The points that establish
the down trendline are the high points or peaks of the upswings,
or minor rallies that run counter to the general downward

The advice to "sell rallies" is typically in reference to a
declining trend and a rebound to the down trendline would be a
good way to do it - there are always some countertrend movements.
In a decline, trendlines that slope down in a very steep manner
are more common than those that have a radically steep upward
slope.  Rallies in a downtrend will usually stop below, at or
near a falling down trendline.

Trendline resistance is the expected selling that tends to
develop on rallies that carry up to a down trendline.

In the hourly S&P chart below, there was an initial high that was
a possible starting point for a downtrend line over to the left
side -

In the SPX chart above, there were 2, then 3 highs that allowed us
to construct an initial down trendline.  Three more rally attempts
after the 3rd. point, was showing that the trendline was defining
an area where selling was overwhelming what buying interest

By the third attempt - 3 strikes and you're out! - exiting calls
and buying puts was definitely suggested.

The lower green (dashed) line is an example of a horizontal line
that can be drawn to show where the tops were of a cluster of
priot tops - keeping to the idea that prior "resistance 'becomes'
support" later on, it suggests a possible area from which the
market could rebound from - time will tell on this.

The hourly Dow Index chart below is of interest because, unlike
the S&P 500 index (SPX) hourly chart there as a second (2) high
occurring not long after the first or initial price peak, that
allowed construction of an initial trendline SOONER than was the
case with SPX - see it's chart above.  This alone is why you it is
good to study related indexes for clues as to trend direction for

By the time that the high that defined point 3 was made, this
offered a good tip off to the fact that selling maybe was going to
predominate and the rally fail and prices reverse.  Buying puts at
that point, then again at the later highs that stopped at the
hourly down trendline was a profitable trade at least to point
shown on this chart above.

The point of all this dear readers is to encourage you to start
drawing - and, re-drawing - trendlines on your charts.  Most all
charting applications allow you to draw them, including many
charting web sites; e.g., Big Charts - using the "Java" chart
option.  Or, if you have paper charts you construct, a ruler or
straight edge allows you to draw trendlines - use pencil however!
Trendlines like trends change often.

The use of trendlines will highlight trading opportunities aht you
might not spot otherwise.

Good Trading Success!


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