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Daily Newsletter, Monday, 05/03/2004

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The Option Investor Newsletter                   Monday 05-03-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Waiting for the Fed
Futures Wrap: See Note
Index Trader Wrap: Catching up


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     05-03-2004            High     Low     Volume Advance/Decline
DJIA    10314.00 + 88.43 10329.05 10227.13 1.94 bln   1722/1118
NASDAQ   1938.72 + 18.57  1954.62  1926.09 1.99 bln   1367/1389
S&P 100   545.85 +  4.97   546.95   540.88   Totals   3089/2507
S&P 500  1117.49 + 10.19  1118.72  1107.30
RUS 2000  565.48 +  5.68   568.38   559.80
DJ TRANS 2923.48 + 36.66  2923.21  2885.60
VIX        16.62 -  0.57    17.72    16.61
VXO        16.63 -  0.93    17.69    16.61
VXN        25.72 -  0.01    26.24    25.35
Total Volume 4,284M
Total UpVol  2,671M
Total DnVol  1,558M
52wk Highs      88
52wk Lows      232
TRIN          0.74
PUT/CALL      0.81
*******************************************************************

Waiting for the Fed
Jonathan Levinson

Monday kicked off on a positive note after Friday afternoon's
deep selloff in the futures.  The Semiconductor Industry
Association (SIA) announced that March chip sales had risen to
$16.8B, up 4.4% from April's level on increased demand for
computers and communications devices.  Optimistic projections
were included in the release, with the SIA saying that 25% growth
for the year is looking "more and more likely."  The SOX was
leading the markets to the upside (though it later gave back all
its gains and closed in the red), the indices were recovering
from their deeply oversold condition from Friday afternoon, and
all looked rosy for a relief rally, or at least a tradeable
bounce.

There was more good news for the markets at 10AM, with March
construction spending increasing by 1.5%  (estimates were for
0.5%) to a record $944.1 billion seasonally adjusted annual rate.
February's reading was revised upward to a 0.4% gain from a 0.1%
decline.  Spending rose 7.9 percent in the past 12 months. While
the jump was in large part attributable to public sector (read:
non-productive) spending, that fact was not part of the
headlines, which bullhorned the high overall reading.   Private,
nonresidential projects dropped by 0.2%, and residential spending
came in above unchanged.

Also at 10AM was the release of the Institute for Supply
Management's Factory activity report for April, which registered
62.4, missing estimates by 3 pennies and down a hair from the
62.5 reading for March.  This makes it sixth consecutive months
during which the index has held above 60.

The combined effect of the 10AM reports was a fleeting spike,
followed by a drop that stopped at a higher low 20 minutes later
as the indices followed through on the anticipated technical
bounce generated by the oversold 30 and 60 minute cycle
oscillators from Friday's steep decline.

Daily INDU candles


The Dow closed higher by 88.43 points or .86% at 10314.  As noted
in the Market and Futures Monitors, the bounce was anticipated
based on the deeply oversold 30 and 60 minute cycles, but the
daily cycle downphase was not interrupted by today's gains.
Bollinger support has crept lower to 10220, which is also price
confluence above the more significant trendline support at 10150.
As is so often the case ahead of a major event such as tomorrow's
Fed announcement, the price is stuck beneath resistance and above
support, with the oscillators assuming an ambiguous
configuration.  This jibes well with the pennant that has
developed, which tends to be a continuation pattern but can break
in either direction.  The daily cycle oscillators favor further
downside, but a move above 10365 on a closing basis would abort
the downphase.  Resistance above is at 10330, followed by 10365
and 10460.


Daily COMPX candles


The Nasdaq rose 18.5 points or .96% to close at 1938.7.  It is
set up more ambiguously than the Dow, having printed an inside
day following Friday's wide-ranging selloff.  This harami pattern
is often bullish, and the unfilled opening gap higher from the
open is a very encouraging pattern for bulls.  However, the long
upper doji shadow above the candle body is a rejection of higher
prices, and the futures dipped following the 4PM cash close.
Once, again the stage is set for Greenspan to break the deadlock.
As with the Dow, the cycle configuration suggests lower prices,
but support is in play and a directional move will lead the
oscillators whichever way traders choose to take it following the
2:15 announcement.  Support is at 1933, followed by 1920 and
1900, while resistance is at 1940, 1965, followed by 1982 and
1995.

In corporate news, JPM and ONE named the board of directors to
lead the company upon completion of their $60 billion merger.
Shareholders from the two banks will vote on May 25. James Dimon,
CEO of ONE and JPM's William Harrison will serve on the board,
Harrison as Chairman.

Google Inc. filed its "love-in" letter from the founders with the
SEC last week, in which lofty proclamations and promises
reminiscent of the New-Economy dotcom bubble from the late-'90s
were offset by a tip-of-the-hat to Warren Buffett.  The founders
received praise from the Oracle himself over the weekend.
Buffett did not go so far as to recommend the IPO, but was
reportedly flattered by the attention from Google's founders.
There was further news this morning to the effect that Google had
canned Goldman Sachs for talking to Kleiner Perkins, one of
Google's large investors.  The theme here continues to be one of
the rejection of "old ideas" and "old banking relationships" in
Google's quest for innovation, based on the assumption that old
is bad and new is good.  While I prefer Google to all other
search engines and have for years, respecting both the product
and the obvious talent that created it, I had thought that the
Dotbomb collapse that helped tank the Naz in 2000 had also
refuted the "we are the world" tech-bubble mentality that
embraces innovation for its own sake.  I strongly urge traders to
recall history.  Be it tulips in Holland, electronics in the
1960's, routers or websites in the 1990's, the old rules of human
emotion married to market supply and demand always apply.  A new
world is not being heralded by the Google IPO, though another
bubblemania milestone may well be.

The management of Taser International (TASR), the stock has
killed countless bears and bulls alike, was talking up its shares
this morning in response to a Barron's article that questioned
its valuation.  The company, assuming the role of investment
bankers, stated that it believes that it merits a forward p/e
ratio of "more than 50", with such a multiple being appropriate
for such a "rapidly growing" company.  It cited taser programs
initiated by 25% of law enforcement agencies, while reportedly
only 6.2% of officers actually have taser guns.  I personally
didn't see the article, but I suspect that Taser, whose ordinary
course of business is NOT the valuation and pricing of
securities, didn't include a discussion of rising bond yields or
other such factors that might otherwise impact the markets or
even its stock.  TASR was lower by 1.10 at 31.24 as of this
writing.

Warren Buffett was also on the wire announcing that he had
increased his purchases of foreign currencies in recent months,
based on concerns about the US current account deficit.  In
March, he had announced that his fund had invested $12B in
foreign currencies, seeing little in the way of bargains among US
assets.  These comments from the world's second richest investor
contrasted with John Snow's bullish comments on the US economy
early this afternoon, in which he cited encouraging economic
trends and predicted a "long period of good above potential
growth."

Just prior to the 4PM close SEBL announced that founder and CEO
Tom Siebel would be passing the torch to J. Michael Lawrie,
former group executive for worldwide sales and distribution at
IBM.  Siebel will stay on as non-executive chairman.  Shares rose
sharply on the news, the stock trading 10.60 as of this writing.]

Tomorrow will be a quiet day for economic data, as we await
Factory Orders for March scheduled for release at 10AM, estimated
at 2.4%, which is significantly higher than the previous .3% in
February.  However, all eyes will be on the Federal Reserve's
Open Market Committee announcement at 2:15PM.  Observers appear
divided on what the Fed will or will not do, citing signs of
economic strength and more particularly the uptick in employment.
On the other hand, capacity utilization has been holding
stubbornly nearly the 75% mark, with the April 16th reading
coming in at 76.4, and this is a number to which the Fed has paid
close attention in the past.

I'm not eager to guess at what the Fed will or will not do next,
but I would be surprised to see anything substantial announced in
either direction.  We have spent a few years now watching the
Bank of Japan jawbone the markets and then fail to deliver as
traders frontrunning the promised action do the Central Bank's
work for it. I'm thinking that the Fed will be following that
example tomorrow.  The US consumer remains saddled with historic
levels of debt, and interest rates remain at multidecade lows.
Despite the uptick in the employment numbers, there's anything
but wage inflation in the US, and higher interest rates continue
to pose a serious threat to debt-saddled consumers. The fear of
the Fed (and the market's acknowledgement of the asset inflation
that Bernanke and Greenspan have so vigorously denied) has
already led to a very substantial correction in the bond market,
with the TNX up nearly 100 bps in the past month.

Whether the Fed hikes the overnight rate by 25 bps tomorrow is a
minor question, and I believe the markets will be listening more
closely to the bias statement.  Will the Fed continue to be
generous with its open market operations?  Will it pick up the
slack left by the deceleration of Asian central bank purchases of
US debt?  Will it act to reign in the inflation it's been
denying, evident in the multidecade highs in the CRB, the bond
and real estate markets, and even the prices paid component of
the ISM which reached a high not seen since 1979?  I believe that
we've seen a fear of a tighter Fed bias getting baked into the
markets for the past month, and it will take strong words from
the Fed to substantially spook bonds or even equities tomorrow.
My guess is for gentler words, perhaps the abandonment of the
"patient for a substantial period" language, and some sort of
relief rally-  and with that said, the stage is now set for a
major dislocation to prove me wrong.

The markets are poised for a decisive move in either direction
here.  The COMPX broke a 5 day losing streak today but is still
locked within a steep shorter-term downtrend.  The Dow hasn't
sustained nearly the same degree of damage as the Nasdaq, but
both are near rising support on the daily and are not
particularly oversold on their key daily cycles.   There is thus
ample evidence on both sides of the trade, and the Fed is in the
unenviable position of having to talk up the economy while
justifying the low rates on which it has been maintained.  We
have seen weak economic data result in bond and equity rallies
due to the expectation of further Fed stimulation.  On a trading
basis, I expect this confusion to result in the usual whipsaws
and headfakes immediately preceding and then following the 2:15
announcement.  Even the most nimble traders will want to keep a
safe distance until the froth has been shaken out.  My preference
here is for countertrend longs at rising pennant support, with
active stops/short entries just below.  Just as a bounce from
support could be ferocious, so could the plunge if it fails.


************
FUTURES WRAP
************

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


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

Catching up

When you spend a week in Northwestern Kansas, you'll catch a
couple of stock and bond market updates, but the real focus in on
hog, cattle and grain prices.

While farmers cheered my annual arrival to St. Francis, Kansas in
pursuit of the elusive wild turkey, they cheered my arrival only
because I brought them rain for a second-consecutive year.

If you're a farmer that needs rain and is overrun with wild
turkey, give me a call and who knows, we may be able to build a
mutually beneficial relationship over the years to come.  Farmers
need rain, and there's few things I enjoy seeing more than an old
boss tom turkey strutting in the wild.  My trouble has always
been staying awake, and my father and close friend tell me I
missed a wonderful picture of an old tom strutting his stuff with
tail fanned just 15-feet from where I was catching a mid-morning
snooze.  Oh well.... Turkey 1, Jeff none.

While I spent most of today catching up on things and still
scraping the Kansa mud and dirt from my boots, the major averages
finished today's session with gains, but the tone was far from
exuberant.

Some of today's hesitation could be blamed on tomorrow's FOMC
meeting, which is expected to shed some light on the Fed's plans
for the economy and timing of future rate hikes.  The question at
this point is when, not if the Fed will raise rates, as economic
data continues to show growth.

Market Snapshot / Internals - 05/03/04 Close



The Semiconductor Index (SOX.X) 440.87 -0.59% was perhaps today's
most volatile sector and action there certainly showed some
uncertainty among technology bulls.  What appeared to be a
stronger-than expected Semiconductor Industry Association (SIA)
report earlier this morning had J.P. Morgan raising its 2004
semiconductor sales forecast from a 22% rise year-on-year to 27%,
but the SOX.X slipped below last week's low of 441.26 intra-day
after Raymond James said one of its recent surveys portends that
the PC replacement cycle is winding down.

The broker said that while commercial IT spending has stabilized,
the firm's U.S. commercial demand survey suggests that the PC
replacement cycle is winding down, where corporate spending on
PCs is now being diverted to more expensive enterprise systems
(severs/storage), where desktop PCs, which account for 70% of the
commercial mix would most likely bear the brunt of a slowdown.

While Raymond James' comments were centered around a
strengthening position for Dell Computer (NASDAQ:DELL) $34.89
+0.31%, a status quo comment for IBM (NYSE:IBM) $88.02 -0.17% and
more negative implications for Hewlett Packard (NYSE:HPQ) $19.65
-0.25%, the SOX.X faded from its best levels of the session just
after 11:00, when the Raymond James comments hit the wires.

I haven't caught up on all of the OI Index Trader Wraps, Market
Wraps and intra-day commentary from last week, but one item that
caught my attention is that while I was out on vacation, the
NASDAQ new high/new low breadth turned notably more bearish on
April 29th, and follows similar negative breadth that was found
in the NYSE a couple of weeks ago, when Treasuries saw sharp
selling after the nonfarm payroll data was released in early
April.

One of the key economic reports due out on Friday will be a
follow up to March's nonfarm payroll data (+335,000) where
economists forecast the economy to have added a more modest
165,000 jobs in April.

Federal Reserve Chairman Alan Greenspan and other FOMC members
would have loved to get a look at the nonfarm payroll data before
tomorrow's meeting, which has been one of the major economic
indicators the Fed has been monitoring for sustainable and steady
improvement before it feels entirely comfortable in raising it
target for the fed funds rate.

U.S. Market Watch - 05/03/04



I can't say the 9% decline in the AMEX Gold Bugs Index ($HUI.X)
over the past 5-days is all that surprising considering the
technical breakdown in this sector a couple of weeks ago, but it
may well be an earnings disappointment from Newmont Mining
(NYSE:NEM) $37.38 -0.05% last week (along with others) that has
investor's attention.  I note this as the U.S. Dollar Index
(dx00y) 90.81 +0.36% is relatively unchanged the past 5-sessions,
while both the weighted XAU.X and non-weighted HUI.X have still
seen continued declines.

In essence, it would have to be my analysis that while the
strength in the dollar the past several weeks has probably been
damaging to gold prices and gold equities as momentum players
have fled the gold sector, there certainly appears to be some
loss of correlation between gold/dollar that had been present for
many weeks, if not months.

As discussed in prior wraps, rising energy/fuel prices may have
been a negative contributor for many mining company's earnings,
and today's trade did find the June Light, Sweet Crude Oil
futures (cl04m) 38.24 +2.3% trading a new contract high.

Obvious rotation out of tech took place last week, where energy
(OIX.X, OSX.X and XNG.X) have been holding steady, as have drugs
and healthcare.  Over the past 5-sessions (past two weeks if
counting the days), the S&P Banks Index (BIX.X) have shown some
stability above their rising 200-day SMA (330.00).

Pivot Analysis Matrix -



I mentioned the BIX.X rising 200-day SMA (considered a longer-
term moving average) and make a note that this may be an
important near-term support level for the BIX.X in the WEEKLY
Pivot Matrix at WEEKLY S1.  I'd want to keep an eye on this
interest rate sensitive sector tomorrow, as well as after the
FOMC meeting tomorrow.  A break below this level would have to be
taken as a NEGATIVE/BEARISH reaction from market participants
toward Fed commentary.  I would note that the BIX.X was the ONLY
equity-based sector that managed to close above its WEEKLY Pivot
in today's trade, and equity bulls may be hiding out in the
sector on thoughts that the bulk of selling in the group has been
seen.

I also market the SOX.X WEEKLY S2 (410.85) with a PINK box.  This
is very close to the 412.00 level, which was the bearish price
objective we had calculated from the head/shoulder top pattern in
the SOX.X.

Semiconductor Index (SOX.X) - Daily Intervals



Here's an updated chart of the SOX.X that we've shown in several
updates.  Tonight I'm noting that Dorsey/Wright & Associates'
Semiconductor Bullish % (BPSEMI) has fallen below the 30% and
would now be deemed longer-term "oversold," where from September-
December of last year, this bullish % stayed well above 70%,
achieving as high a 88% and very "overbought" levels of bullish
%.

In the last hour of today's trade, the SOX.X found some buying at
its last upward trend from the October lows.  I agree with fellow
analyst Leigh Stevens comments from late last week that things
look oversold near-term, but with broader market internals
(bullish % along with NH/NL indications) deteriorating, I think a
bounce in the SOX.X back near its MONTHLY Pivot provides another
good short, but bears will be willing to cover any decline back
near 412.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals



Near-term resistance forms at the QQQ WEEKLY/MONTHLY Pivots and
while we would expect some volatility tomorrow, if not until the
end of the week into the nonfarm payroll data, the NASDAQ-100
Bullish % ($BPNDX) has reversed back lower to "bear confirmed"
status and I would view $36.50 as MAJOR resistance for any
bounce, and should the SOX.X break below its last upward trend
from the October 2002 lows, then QQQ vulnerable to $34.00 minimum
and potentially $33.00 into the summer.

I haven't been able to update the other major indices with their
new WEEKLY/MONTHLY Pivots, but here's something I'm looking at
with LAST WEEK'S and LAST MONTH's pivot retracement still on the
SPX.

What I'm doing is comparing some of the NEW weekly/monthly levels
present in the matrix, with how the SPX continues to trade
against the WEEKLY pivot matrix from 2 weeks ago (for 04/19-
04/23).  My thoughts here are that Friday's and today's lows are
important near-term support, where if broken, the SPX could dart
sharply lower to the currently correlative WEEKLY S1 and MONTHLY
S1.  Meanwhile, the 04/19-04/23 WEEKLY S1 (1,120.58) is THIS
WEEK's WEEKLY Pivot 1,120.46 and near-term resistance.

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



The above chart with retracement show is the same SPX chart I
viewed BEFORE I left for vacation, but give me the observation
that this 1,106 level is still an important near-term level of
support, where if broken to the downside, the SPX becomes
immediately vulnerable to its CURRENT WEEKLY S1 of 1,094.71.

It is my thinking that as more and more stocks begin giving point
and figure sell signals, then computers should have a sell bias
forming at the CURRENT weekly R1, where I do think the SPX should
work its way lower.

Near-term resistance on the ABOVE chart would certainly look to
be the 1,120.58 level (from two weeks ago), but this is ALSO THIS
WEEK's WEEKLY Pivot of 1,120.46.

The observation I begin to get from this type of view is that the
WEEKLY Pivot matrix is "working itself lower," while the NEW
MONTHLY Pivot retracement is narrowing compared to May (S2 moving
up, R2 moving down) as if the SPX is perhaps going to try and
establish a summer range from 1,080-1,040.

I'll get all the major indices pivot retracement updated tonight,
and post their charts tomorrow, but my basic analysis would be
more bearish.

Jeff Bailey


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The Option Investor Newsletter                   Monday 05-03-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: SLAB, COF, LTR
Dropped Calls: WFMI
Dropped Puts: None
Watch List: MXIM, IBM, YHOO, LLY


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STOP-LOSS UPDATES
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SLAB - Put Play
Adjust from $52.00 up to $50.40

---

COF - Put Play
Adjust from $69.01 down to $68.31.

---

LTR - Put Play
LTR was triggered at $57.74 today.  Stop remains at $60.01


*************
DROPPED CALLS
*************

Whole Foods Market - WFMI - cls: 79.50 chng: -0.49 stp: 79.25

Well, we knew the tight range of the past week was due to be
broken eventually and today was the day, with WFMI weakening a bit
ahead of Wednesday's earnings report.  The stock dipped under the
10-dma ($79.77) again early in the day and this time it wasn't
able to recover.  The continued weakness throughout most of the
day dragged WFMI down to trigger our $79.25 stop shortly after
traders returned from the lunch hour.  Despite the rebound into
the close, we're happy to honor our stop and be out of the play
ahead of tomorrow's expected volatility.  Any traders still
holding open positions should take advantage of continuation of
the late afternoon bounce to exit the play in the $80-81 area.

Picked on April 15th at      $76.01
Change since picked:          +3.49
Earnings Date               5/05/04 (confirmed)
Average Daily Volume =        696 K



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DROPPED PUTS
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None


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Watch List
**********

Maxim Integrated Products - MXIM - close: 45.49 change: -0.55

WHAT TO WATCH: After the company's recent earnings report failed
to provide a bullish catalyst, MXIM has headed further south,
solidifying its break below the 200-dma.  The stock is now in
danger of breaking its March low at $43.70 and that will unleash a
fresh round of selling that should take the stock first down to
the $40 area, with the potential for a more protracted decline
down to the $36-37 area.  Note that the PnF chart is currently on
a Sell signal with a bearish price objective of $33.

Chart=


---

International Bus. Machines - IBM - close: 88.00 change: -0.17

WHAT TO WATCH: With the persistent weakness in the Technology
sector, IBM has been driven down to the final level of near-term
support near $87.  A break below that level will have the bears
getting more aggressive again, with the strong support in the $80-
81 area being a logical target.  Use a trigger under today's low.
Alternatively, a failed bounce below the 200-dma near $90 would
provide an even better entry.  Note that the PnF chart is on a
Sell signal, with a bearish price objective of $81.

Chart=


---

Yahoo! Inc. - YHOO - close: 52.30 change: +1.77

WHAT TO WATCH: Is that a real rebound?  After getting hammered
with the rest of the Technology sector last week, YHOO rebounded
smartly on Monday, right from the $50 level, as old resistance
appears to be providing firm support.  This looks like a good spot
to step into new bullish positions on a successful retest of the
$50 support level, targeting a rise back towards the $55-56 area.
A firm stop should be employed just under the 50-dma though, due
to the fact this is a rather risky play.

Chart=


---

Eli Lilly Company - LLY - close: 74.66 change: +0.85

WHAT TO WATCH: Positive reception of LLY's earnings report on
April 19th gave the stock the bullish catalyst it needed and for
the past week it has been testing key resistance just under $75.
This looks like the perfect setup for a breakout play.  Use a
trigger over $75 and target an initial move to the $80 level.
Note that the buy signal on the PnF chart paints a strong bullish
picture with an upside target of $93.

Chart=



===================
On the RADAR Screen
===================

ADI $42.28 - As expected, ADI finally broke down below strong
support near $44 last week and that weakness persisted today, with
the stock probing down to the $41.50 level before an end of day
rebound.  A continued rebound should set up a favorable
continuation short near the $44-45 area, where we can anticipate a
decline towards the $38 level ahead of the company's May 13th
earnings report.

JCI $55.41 - The broad market weakness last week looks like it
finally cracked the bottom of JCI's trading range.  At the same
time, the stock appears to be finding support at the bottom of its
descending channel and right at the 200-dma.  Look for a failed
rebound near the 50-dma to provide for new bearish entries,
targeting a drop through the 200-dma to test strong support near
$52.


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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Littleton, CO 80163

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