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The Option Investor Newsletter                   Monday 05-10-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Dow 10K, S&P 1100, Naz 1900 Fall
Futures Wrap: See Note
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     05-10-2004            High     Low     Volume Advance/Decline
DJIA     9990.02 -127.32 10116.28  9932.74 2.29 bln    317/2634
NASDAQ   1896.07 - 21.89  1907.98  1880.32 1.86 bln    697/2443
S&P 100   532.68 -  4.67   537.35   528.74   Totals   1014/5077
S&P 500  1087.12 - 11.58  1098.70  1079.63
RUS 2000  537.86 - 10.70   548.56   533.51
DJ TRANS 2810.01 - 36.17  2842.53  2789.03
VIX        19.77 +  1.64    20.20    18.99
VXO        19.74 +  0.67    21.29    19.43
VXN        27.91 +  2.41    28.15    26.75
Total Volume 4,800M
Total UpVol    953M
Total DnVol  3,768M
52wk Highs      32
52wk Lows     1181
TRIN          0.84
PUT/CALL      1.28
*******************************************************************

Dow 10K, S&P 1100, Naz 1900 Fall
Jonathan Levinson

The selling began after the cash close on Friday and resumed in
the futures last night.  The markets gapped lower at the open,
ran to their lows just before noon and then bounced, moving
sideways in a range for the duration of the session.  Volatility
was sharply higher as premium increased in the options market,
while bonds traded mixed to lower.  Today's close was the lowest
close of the year for the indices.

Despite the 1%+ losses on the Dow, SPX and Nasdaq, bellwethers
such as GE and MSFT finished in the green.  Whether this was a
legitimate heads-up on a market turn to come, or mere tape-
painting by mutual funds and the Fed's 23 dealers using the 6B in
repo money added today, remains to be seen.  The intraday indices
were oversold and trying to turn up off the lows at the close,
and whether it's a deadcat bounce or a 30 minute cycle upphase, a
bounce is due in all the intraday timeframes.  The trouble for
bulls is not the intraday cycles, however, but rather the longer
ones, the daily, weekly and monthly, all of which are in
synchronous downphases.


Daily Dow Chart


The Dow violated trendline support at 10180 and never looked
back, falling below confluence and psychological support at 10K
and closing below it.  There's confluence support from 9930 to
9800 accumulated over the years, and I don't expect the bears to
have an easy go of further downside in that range.  But price
never reacts to support the same way twice, at least not
predictably, and I'm not inclined to blindly trust these levels
for bullish trades.  The longer cycles remain firmly down, and
the daily shows no sign of having bottomed yet.  If, however, a
meaningful bounce can launch off the intraday cycles (not shown),
as those shorter oscillators are suggesting, and the move is
sufficient to turn the daily cycles up from here, there will be a
bullish oscillator divergence and the move should have good
upside force.


Monthly Dow Chart


I've zoomed out to a three year monthly view of the Dow to show
the 3-crows bearish pattern as well as the sell signal on the 10
month stochastic.  The issue for me on this monthly timeframe is
whether the bulls can put together a sufficiently strong daily
cycle upphase to retest either broken bear wedge apex or the
descending trendline at 10650ish.  If this is a significant top
forming, a "return to the scene of the crime" distribution rally
would not be out of the ordinary.  However, for the moment, the
combination of the daily, weekly (not shown) and monthly
downphases is producing extreme weakness, and for the moment the
trend on these longer timeframes remains down.


Daily Nasdaq Chart


The Nasdaq closed at 1896.  It would be premature to conclude
that 1900 is history, particularly given the potential for a
bullish oscillator divergence on the daily chart.  Support came
at a low of 1880, but the selling was sufficiently constant to
prevent any of the clear, directional moonshots that we've come
to expect since 2003 on tests of critical support.  Below 1880,
there's support at 1845.  As with the Dow, a strong intraday
upphase based on the 30 and 60 minute charts, due to commence
imminently, could set up a strong launch on the daily.  A failure
to bounce tomorrow would constitute a "crash" in the 30 minute
timeframe as the market trends lower.  Given the weakness in the
daily, weekly and monthly oscillators, traders trying to play
that countertrend bounce need to be close with their stops and
nimble, as the afternoon chop today showed us.


Monthly Nasdaq Chart


The monthly Nasdaq chart is more difficult to read because of the
higher peak in spring 2000.  But again, the monthly cycles are
rolling over.  A strong daily cycle upphase could whip the price
back up to the year highs as a distribution top, but such could
also set up a reverse head and shoulders below 2100 or a simple
bull flag breakout.  I cite these setups despite the sell signal
on the 10 month stochastic and the anticipated signal on the Macd
to show both sides of the coin.  Bulls see this move as a
correction of the 2003 rally, while bears see the 2003 rally as a
correction of the 2000-2002 decline.  While the intraday cycles
want a bounce tomorrow, the top of that bounce is going to
determine a lot for the Dow and Nasdaq.  A lower high suggests a
weak daily cycle, which suggests that the weekly is also bearish,
which suggests that the monthly is indeed in a new bearish phase.
A higher high could launch a daily cycle rally that could
challenge the breakdown, if not the year highs.


Weekly chart of the OEX:VXO ratio


Another perspective on the current downleg is by viewing the
ratio of the S&P-100, the OEX, to its corresponding volatility
index, the VXO (the old VIX).  By measuring the OEX:VXO ratio, we
can chart the OEX' price trend relative to option volatility.  As
we know, option volatility tends to rise when price declines, and
vice versa.  By placing this relationship on a single chart, we
can view the general trend, which here is in a clear downphase on
the weekly chart. We see that the OEX:VXO is at a confluence
level at current levels, which should provide support for the
OEX/ resistance for the VXO.  Next support is in the 18 area.


Weekly chart of the QQQ:QQV ratio


The QQQ:$QQV ratio is also locked in a weekly downtrend and also
in a support zone.  It's worth noting, as with the OEX:VXO, that
this ratio has not reached these levels of oscillator weakness
since 2002, indicating that the force of the drop in
price/increase in volatility exceeds any we've seen in 2 years.


Weekly chart of NYSE New highs-new lows


Here's one last perspective on the recent action.  The chart of
new highs minus new lows for the NYSE is a simple snapshot of
breadth.  The internal damage appears to be far worse than the
price declines would otherwise indicate.

It was a quiet news day overall, with no major economic news to
report and the markets trading on their own.  Before the bell, it
was announced that C would incur a $1.6B charge to settle
litigation with Worldcom shareholders without admission of
liability.  C closed lower by 2.8% at 45.41.  Combined with
general rate-hike-related malaise, banks were weak, with the $BKX
closing lower by 1.6%.

President Bush made a statement at the Pentagon after receiving a
briefing from his national security team, coming out strongly in
defense of Secretary of Defense Rumsfeld:  "You are courageously
leading our nation in the war against terror, you are doing a
superb job, you are a strong secretary of defense and our nation
owes you a debt of gratitude."  He warned that that there remain
hardships and sacrifices to come, and that the US will continue
to aggressively oppose militants in Iraq.    The statement was no
doubt in response to the fireworks from Rumsfeld's appearance
before the Senate Armed Services Committee on Friday, but also
came on the heels of a scathing editorial in The Army Times, a
Gannett Co. Inc. (GCI) newspaper that reports on the U.S.
military.  The editorial asserted that both Rumsfeld and Joint
Chiefs Chairman Myers are guilty of professional negligence in
the affair.

Crude futures were weak and led the CRB lower, with the move
being credited to news that Saudi Arabia said OPEC should raise
its production quota by 1.5 million barrels per day.  Saudi
Arabian Oil Minister Ali al-Naimi said that OPEC should increase
its production target by over 6% when it meets on June 3.  "We
[...] do not want to see prices rise to the level that they
negatively affect the growth of the international economy or the
demand for oil.  It is apparent that demand, especially that of
Asia, has and will continue to increase in the second half of
this year."

The Federal Reserve fined one of its primary dealers, UBS, $100M
for its business dealings with Cuba, Iran, Libya and Yugoslavia.
The Fed's 3 page order asserted that "certain former officers and
employees of UBS engaged in intentional acts aimed at concealing"
bank transactions with these countries. UBS agreed to pay the
fine without admitting to any of the allegations.

IBM announced new software for corporate desktops to provide
open-source alternatives to Microsoft Office. The company said
that the new server-managed software package would permit users
to deploy business applications and data on desktops, laptops,
and hand-held computers, and is designed to support Microsoft
Windows, Unix, Linux and other operating systems with Mac support
to be added later. Being a satisfied user of the free
"OpenOffice" suite, I find it encouraging to see open source
competition for this critical software space.  I believe that
end-users are the ultimate beneficiaries of competition, both in
terms of price and quality.

XMSR was very weak throughout the session on news of its Friday
filing for the resale of 10M shares owned by GM at a warrant
strike price of $3.18 exercised in April 2004.  XMSR finished
lower by 6.05% at 21.62.

For tomorrow, I'm keeping an open mind.  On the one hand, it
would be reasonable to expect the oversold bounce mandated by the
60, 30 and short cycle oscillators.  On the other hand, the
internals look so awful and the daily, weekly and month
stochastics are so uniformly bearish that if there were to be an
intraday trending move or "crash" in the intraday cycles, it
would not be surprising here.  Bellwethers such as GE and MSFT
were strong and finished green despite the broader market
destruction, either because they were being used to prop the
indices price-wise, or because funds and traders were loading up
in anticipation of that short cycle bounce.

Crashes, even on the 30 and 60 minute timeframes, are less common
events as oscillators tend not to trend in oversold or
overbought.  The odds favor a bounce here.  If it doesn't occur,
then bears need to be sufficiently nimble and flexible to let
their stops take them out of it.  Don't get caught the wrong
side, whichever side that turns out to be.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_051004_1.asp


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The Option Investor Newsletter                   Monday 05-10-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: AMZN, WHR, MSTR, GM
Dropped Calls: OMC
Dropped Puts: BZH
Watch List: Sell All Rallies


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*****************
STOP-LOSS UPDATES
*****************

AMZN - put play
Adjust from $45.25 down to $44.75.

---

WHR - put play
Adjust from $67.15 down to $65.76

---

MSTR - put
Adjust from $50.05 down to $48.05

---

GM - put
Adjust from $48.00 down to $47.25


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

Omnicom Group - OMC - close: 79.04 change: -1.86 stop: 79.25

We never got a chance to play on OMC, and in retrospect
that's a real good thing.  The stock failed to give the
bullish follow-through with a breakout over $84 and
that kept us safely on the sidelines.  The past 3 days
have seen the stock come under heavy selling pressure
with the rest of the market and today's plunge under
$79 tripped our coverage stop.  Obviously, the play's a
drop, but the price action in this particular play
provides a strong reminder of the value of using those
entry triggers when appropriate.

Picked on May 4th at         $82.78
Change since picked:          -3.74
Earnings Date               4/27/04 (confirmed)
Average Daily Volume =     1.21 mln
Chart=



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************
DROPPED PUTS
************

Beazer Homes - BZH - close: 91.40 chg: - 1.07 stop: 97.41

That was quick.  Monday's weakness sent BZH down to hit our $90.30
profit target by shortly after 11:00 EST.  BZH continued down to a
low of $89.30 before beginning a bounce that sent prices more than
two points off the low of the day.  We think BZH could eventually
continue lower, perhaps as low as the $77-80 support.  The P&F
chart shows a triple-bottom breakdown with a current downside
target at $79.00, so the bar chart support and P&F target show
some correlation.  BZH could also see the $73.75-$74.00 downside
target from its weekly H&S.  However, we also noted significant
possible support in the $90.00 level, support that produced the
bounce today and might send BZH back up to test its 200-dma or
even the violated H&S neckline, nearer $99-100.00.  We didn't want
to see a profitable play turn unprofitable if that bounce
potential was realized.

We're not sure that bounce will occur, of course.  Turning to the
chart of the $DJUSHB, the Dow Jones US Homebuilders, we note that
this index does not show a completed H&S on the daily chart, but
instead shows a left shoulder and head, with the possibility that
the index could bounce up into a right-shoulder formation.  That
index reached possible neckline support.  Of course, we've also
seen some of these formations crash through the necklines without
ever forming a right shoulder.

We'll keep our eye on BZH to see if this stock might be added back
to our list after a bounce.  For now, the play is closed.

Picked on May 07 at $ 95.49
Change since picked: - 4.09
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   501 hundred thousand
Chart =



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

Sell All Rallies

Caterpillar Inc. - CAT - close: 72.88 change: -4.24

WHAT TO WATCH: Leading the DOW lower on Monday, shares of CAT
plunged 5.5% and just barely managed a rebound from above the $72
level after smashing the 200-dma.  With a PnF Sell signal and a
downside target, CAT looks like it has lots of room to fall.
While aggressive traders can consider entries on a break below
$72, the better strategy would be to look for entries on a failed
rebound in the $75-76 area, right at the site of the broken 200-
dma.  Initial support will likely be found at $69 (the PnF bullish
support line), and then $65 should be in play as a downside
target.

Chart=


---

Ryland Group Inc. - RYL - close: 72.67 change: -1.51

WHAT TO WATCH: With heavy selling the theme again in the Housing
stocks, shares of RYL plunged by more than 2% on Monday and the
stock looks terribly weak here.  Today's drop through the $73
level issued a fresh PnF Sell signal and while it is possible that
the stock will find support near $70 at the site of the January
lows, a more likely stopping point will be the lows from last
August in the $63-65 area.  Aggressive traders can look for
entries on a break below today's intraday low, while the more
conservative approach will be to wait for a break below the
January low before playing.

Chart=


---

Centex Corp. - CTX - close: 44.49 change: -1.41

WHAT TO WATCH: As bad as RYL looks, CTX looks even worse, with the
stock breaking below all possible support going back to last
October.  Selling volume is running strong and the stock appears
destined to test first $40 and then stronger support near $37.50
as investors flee the Housing sector with interest rates almost
certainly on the rise in the near future.  CTX has fallen a long
ways in the past couple sessions, so our preference for entries is
on a failed bounce below the $47 level, which should be strong
resistance.

Chart=


---

International Business Mach. - IBM - close: 86.88 change: -1.31

WHAT TO WATCH: We looked at shares of IBM last week as a breakdown
candidate, preferring a failed bounce below $90 as the entry
point.  After popping to $89.75, Big Blue tipped over and today
broke under the $88 support level on rising volume.  Failed
rebounds near $88 still look good for entries, but we'd suggest
getting a bit more aggressive now that support has been broken.
Momentum entries can be considered on a break under today's lows,
targeting a drop to the $80-81 support area.

Chart=


---

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

ESRX $73.66 - It wasn't that long ago that we successfully played
the upside in ESRX, but along with the rest of the market, the
stock has lost its bullish appearance, breaking under the 50-dma
last Friday.  The stock lost more ground today and is on the verge
of a more serious breakdown.  Look for a break below $72 as the
trigger point for bearish entries.  Target a drop first to $70 and
then to what should be strong support near the 200-dma just over
$66.

LEN $43.23 - Do we dare list another Housing stock today?  Sure!
LEN fell through the 200-dma today on strong volume and is right
on the verge of breaking major support at $42.50.  Use a trigger
under that level and target a drop to the next tangible support
level near $38.

RIMM $89.52 - While we've tried unsuccessfully to play the
downside in this high-flying stock in recent weeks, it still
appears that a major breakdown is in the making.  Today's
performance wasn't too bad considering the action in the rest of
the market, but the overall picture is one of weak, topping
action.  Wait for a break below key support near $83 and then play
for a move down to the $70 level.  Note that the PnF chart is
already on a Sell signal with a downside target of $64.


*******************
FREE TRIAL READERS
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If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You mar
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you mar go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you mar simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you mar call us at 303-797-0200 and give us the
information over the phone.

You mar also fax the information to: 303-797-1333


**********
DISCLAIMER
**********

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