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Daily Newsletter, Thursday, 05/13/2004

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The Option Investor Newsletter                Thursday 05-13-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Inflation Returns
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Breadth Improves


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      05-13-2004           High     Low     Volume   Adv/Dcl
DJIA    10010.74 - 34.40 10074.11  9970.93 1.69 bln 1481/1709
NASDAQ   1926.03 +  0.40  1937.87  1914.10 1.56 bln 1373/1709
S&P 100   536.23 -  0.94   539.39   533.91   Totals 2854/3418
S&P 500  1096.47 -  0.81  1102.77  1091.76
W5000   10650.61 -  7.20 10713.69 10607.62
SOX       459.57 -  2.30   464.75   455.08
RUS 2000  547.17 -  1.82   552.40   545.00
DJ TRANS 2859.79 + 12.50  2866.02  2838.00
VIX        18.86 +  0.72    18.92    17.97
VXO (VIX-O)19.39 +  0.90    19.78    18.41
VXN        28.11 +  0.49    28.33    27.37
Total Volume 3,597M
Total UpVol  1,642M
Total DnVol  1,916M
Total Adv  3187
Total Dcl  3853
52wk Highs   48
52wk Lows   275
NasTRIN    0.78
TRIN       1.02
PUT/CALL   1.01
************************************************************

Inflation Returns
by Jim Brown

Traders worst nightmares began to resurface today with a
higher than expected PPI report. The overnight gain in the
futures was erased in minutes and the markets opened under
a rate cloud once again. It is a picture of things to come
as the economy grows so do prices and the Fed can't be far
behind.

Dow Chart - Daily


Nasdaq Chart - daily


Russell-2000 Chart - Daily


SOX Chart - Daily



Jobless Claims jumped from 318K to 331K last week and only
slightly higher than consensus. No real news there other
than the 4-week moving average fell to 336K and the tenth
week under 350K. This is the lowest level since the economy
began to recover. The trend is continuing to decline and
that suggests job creation is still growing. As long as
claims remain under 350K per week we should continue to
add 175K of jobs per month based on historical norms.

Retail Sales for April fell -0.5%, well below consensus and
well below the +2.0% gain in March. The culprit is higher
gasoline prices and the undeclared energy tax that is ripping
cash out of consumer pockets. Auto sales are dropping with
a -1.8% fall for the month and shared the top of the loser
list with apparel at -2.0%. Building supply stores also
lost ground as rising mortgage rates slow home buying. This
was a material change from the +11% gain in March. Sure
sounds like trouble ahead. This was the first monthly decline
in the headline number since September and helped to fan the
flames of worry over the declining consumer. With the summer
doldrums ahead the retail outlook is not exciting with oil
prices continuing to rise.

Oil prices rose to close over $41 per barrel today, a new
13-year high and spot prices of unleaded gasoline were above
the level of the futures. This represents surging demand as
the summer driving season begins and suggests some really
high prices for the summer. Analysts claim a surge in
output by OPEC would not necessarily help demand because
all the oil tankers are chartered to full capacity and
there is nothing left to press into service to haul oil.

The big report today was the PPI, Producer Price Index, which
jumped +0.7% and more than twice consensus estimates at +0.3%.
Energy prices were the main culprit once again with the core
rate, minus food and energy, rising at only +0.2%. If you
do not eat or drive your inflation is only moderate. The
talking heads were trying to downplay the headline number
but a closer inspection shows the inflation rate of
intermediate materials rose +1.37% for the month. Even if
you take out food and energy that number rose +1.12%. This
is pure inflation and at a high rate. Crude materials rose
+3.0% and Foodstuffs rose +3.65%.

This immediately knocked the bloom off the pre-market futures
and the Dow opened down -75 points. Fear of a faster than
expected rate hike scenario sent the yields on the ten-year
note to 4.85% and a new two-year high. Mortgage rates knee
jerked to new recent highs and all eyes became even more
focused on the June-30 Fed meeting. This is going to be a
critical period on the market calendar. The Fed will raise
rates and Iraq will be turned over to Iraq rule on June-30th.
2Q earnings begin July 7th with YHOO and the Democratic
convention starts three weeks later. Everyone will be
handicapping the race as democrats grab the spotlight. The
Olympics should begin two weeks after the convention assuming
they finish the preparations and terrorists take a holiday.
It is going to be a tough news environment over the summer.

Fear of these news events probably had a lot to do with the
lack of any follow through from yesterday's rebound. There
may also have been some fear of Dell's earnings tonight but
Dell did come through and hit their estimates of 28 cents.
There were numerous analysts debating the results after the
bell and Dell dropped more than $1 in after hours trading.
There were as many excuses as there were analysts but the
main sticking point was a drop in margins. Higher Dram costs
and faster growth in lower margin businesses impacted the
overall margin. Not a big deal in my opinion. Dell like
Cisco has grown so large that they lack any real earnings
leverage and are forced to grow the old fashioned way. Dell
did see very strong growth in software, peripherals and in
its Asian business with China seeing a jump of +33%. Dell
is locked in a global battle with HPQ and they are competing
on a price level that prevents them from raising prices to
adjust for pricey components. Dell is still opting for more
market share instead of more profit. Dell issued inline
guidance of 29 cents for the current quarter. Dell had been
expected to beat by a penny according to the whisper numbers
but the higher memory costs prevented it despite a beat on
revenue by +$100 million.

ADI posted better than expected earnings and beating by +4
cents. ADI said profit more than doubled on strong demand
for consumer electronics. ADI guided higher for the current
quarter as well. ADI makes chips for cell phones and other
consumer goods. BEAS took it on the chin after reporting
inline revenues but said license revenues failed to hit its
targets. BEAS lost -1.50 in late trading. ADIC posted a
surprise loss -2 cents and said sales were falling amid
rising expenses. Estimates were for a profit of six cents.
The stock dropped -25% in late trading.

There was also good news making the rounds with Intel, Dell
and others saying they were raising their capex spending as
customer demand increased. Dell said corporate demand was
at a 3.5 year high. That can't be bad news.

Unfortunately the big brokerages are still cautioning about
potential tech weakness ahead. Merrill issued a comment that
the odds of a bear market in tech are increasing and hedge
funds added to their short positions. In the last hour of
trading on Wednesday when the massive short squeeze was in
progress there was over $26 billion in volume on the QQQ
and SPY. The closer we get to a 200dma failure the more
funds are hedging their bets. Currently open interest on
the QQQ May-34 puts is 650,000. The May-35 puts are 350,000.
These are huge bets the 200-day averages are going to fail.

This bearish sentiment is depressing buyers and the rebound
from Wednesday failed to show any follow through. I have
heard several stories about why that rebound may have
occurred but I think it was purely technical to start and
aided by a couple buy programs. On Tuesday I suggested that
the 200dma on the SPX at 1078 was very strong support and
could produce our best chance of a rebound. We hit 1078
three times on Wednesday with no material penetration. The
corresponding 200dma on the S&P futures was 1075.50 and the
low for the day was 1075.25. Personally I think we saw a
couple strong buy programs on a rebound from technical
support on very oversold conditions. The result was a severe
short squeeze and a rebound to prior resistance levels.





Had there been any real change in buying sentiment we should
have seen some follow through on Thursday. The Dow did recover
from the morning PPI dip but could not hold any gains over
10050. It was a battle just to stay over 10K at the close. The
current 200ema is 10003 and 200sma is 10017 and the Dow closed
right between them at 10010. The index fought those levels for
the last two hours of trading and failed to find conviction on
either side.

The Nasdaq was also stuck just above its 200ema at 1915 and
just below the simple 200 at 1943. It closed flat after trading
a dozen points on either side of zero and 1930 seems to be solid
resistance. With all the negative bias and the two trips to 1880
earlier in the week we should be thankful just to hold over 1900
for the last three closes. The Dell, BEAS, ADIC, ADI news after
the close initially sent the futures into the cellar but they
did recover some lost ground while waiting for the Nikkei to
open.

On Thursday the Nikkei closed down -328 at 10825. This is nearly
-1400 points from the April 26th 12195 high. If the Nikkei falls
again tonight the U.S. markets could quickly test their 200dma
support once again.

Bonds are continuing to crash on the potential for future rate
hikes but it did not hinder the quarterly refunding this week.
The 10-yr notes went off at 4.848% with a bid to cover of 2.78.
That was the strongest ratio since August-2001. Indirect bidders,
a group that included foreign banks, bought 43% of the notes sold.
This was very strong and up from 19.9% in the March sale. The 5%
level is a level that will attract numerous large buyers and the
PPI jump this morning pushed the yield very close to that level.
A safe 5% yield can look very attractive to many institutions
instead of stocks when the market is shaky.

For Friday we have the CPI, Consumer Price Index, and numbers
like we got on the PPI this morning will not be met with much
excitement and probably not many buyers. We will also get the
Business Inventories, Industrial Production and Michigan
Sentiment. None of those are expected to be shockers but just
more evidence the economy is growing slowly. If the Nikkei
trades down tonight there could be more weekend event risk
than usual. The last few Friday's have been mixed with both
gains and losses but the last two Friday's have been losers.
There is no real trend and this near the 200 day averages we
could find about as many bargain hunters as sellers. The wild
card is fund flows. With the market hitting new lows this week
we could be seeing fund withdrawals and Friday could be a pay
the piper day. I could find no reporting of fund flows today
and that is normally negative. They want to advertise when
money is flowing in but not when money is flowing out. Bottom
line, I am still in sell the rally mode and the Dow has strong
resistance at 10150 and 10200. Another major dip under 10K may
not be bought and the bulls have got to be nervous after barely
hanging on to that level for four days. The Nasdaq still has
strong resistance at 1930, 1950 and 1965 and very few buyers.
Another drop under 1900 could be the signal for the next leg
down. Next Friday is option expiration and recently the prior
week has seen lots of option related volatility. Tomorrow
could be really exciting or really boring depending on who
finds conviction first.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


***************
FUTURES MARKETS
***************

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp



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



Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_051304_1.asp




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

Breadth Improves
Jonathan Levinson

Today's pullback following yesterday's sharp intraday upside
reversal saw volatility increase, but breadth improved, as the
number of new highs rose against new lows for the NYSE and
Nasdaq.

Up volume over down volume was nearly even on the NYSE and
Nasdaq, slightly higher for the NYSE and slightly lower for the
Nasdaq.  The exception was for the AMEX, with the number of new
lows increasing from yesterday and with down volume 6x up
volume.  Volume was moderate on all 3 exchanges.

For tomorrow, we have the 8:30 release of the Core CPI for April,
estimated at +.2%.  At 9:15, there's industrial production and
capacity utilization for April, estimated at .5% and 76.7%
respectively.  Michigan sentiment is last at 9:45, estimated at
+96.

These reports will hopefully catalize a move out of the range
that held through Wednesday, and give us a clearer indication of
direction for the coming week.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8416
Current     : 10010

Moving Averages:
(Simple)

 10-dma: 10159
 50-dma: 10314
200-dma: 10017



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  912
Current     : 1096

Moving Averages:
(Simple)

 10-dma: 1105
 50-dma: 1122
200-dma: 1078



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1103
Current     : 1417

Moving Averages:
(Simple)

 10-dma: 1413
 50-dma: 1440
200-dma: 1416



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

CBOE Market Volatility Index (VIX) = 18.86 +0.72
CBOE Mkt Volatility old VIX  (VXO) = 19.38 +0.89
Nasdaq Volatility Index (VXN)      = 28.11 +0.49


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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.01        684,749       692,405
Equity Only    1.89        145,455       274,349
OEX            2.97         27,000        80,245
QQQ            0.57        127,770        72,608


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

Bullish Percent Data

           Current   Change   Status
NYSE          62.4    - 2     Bear Confirmed
NASDAQ-100    34.0    + 1     Bear Confirmed
Dow Indust.   66.7    - 3     Bear Confirmed
S&P 500       59.0    - 1     Bear Confirmed
S&P 100       61.0    - 3     Bear Confirmed



Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


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

 5-dma: 1.07
10-dma: 1.02
21-dma: 1.02
55-dma: 1.01


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


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1374      1321
Decliners    1471      1726

New Highs      24        37
New Lows      103        49

Up Volume    806M      783M
Down Vol.    897M      722M

Total Vol.  1716M     1519M
M = millions


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

Commitments Of Traders Report: 05/04/04

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

Commercials reduced their longs and increased shorts slightly,
while small traders added to longs and covered shorts.


Commercials   Long      Short      Net     % Of OI
04/12/04      412,827   419,910   ( 7,083)   (0.9%)
04/20/04      409,729   421,456   (11,727)   (1.4%)
04/27/04      406,927   416,244   ( 9,317)   (1.1%)
05/04/04      397,964   417,175   (19,211)   (2.4%)

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
04/12/04      135,840    89,090    46,750    20.8%
04/20/04      136,699    92,982    43,717    19.0%
04/27/04      133,775    90,535    43,240    19.3%
05/04/04      137,112    80,201    56,911    21.6%

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

Commercials added to longs and maintained their shorts,
while small traders significantly reduced their long
positions and added to shorts.


Commercials   Long      Short      Net     % Of OI
04/12/04      261,889   341,163    (79,274)  (13.1%)
04/20/04      275,985   355,555    (79,570)  (10.1%)
04/27/04      291,365   370,549    (79,184)  (12.0%)
05/04/04      316,840   370,781    (53,941)  ( 7.8%)

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
04/12/04      172,473     52,274   120,199    53.5%
04/20/04      186,799     69,137   117,662    46.0%
04/27/04      175,788     69,613   106,175    43.3%
05/04/04      119,308     74,407    44,901    23.2%

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


NASDAQ-100

Commercial traders increased their long positions and short
positions, but the net addition to longs was sufficient to set a
 new high bullish reading of the year for the second week in a
row.  Small Traders added slightly to longs and more heavily to
shorts, setting a new most bearish reading of the year -


Commercials   Long      Short      Net     % of OI
04/12/04       54,144     34,432    19,712   22.3%
04/20/04       54,852     35,964    18,888   20.8%
04/27/04       54,196     33,948    20,248   23.0%
05/04/04       56,931     35,209    21,722   23.6%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  21,722   - 05/04/04

Small Traders  Long     Short      Net     % of OI
04/12/04        8,297    20,746   (12,449)  (42.9%)
04/20/04        8,538    19,431   (10,893)  (39.0%)
04/27/04        9,008    20,347   (11,339)  (38.6%)
05/04/04       10,247    24,764   (14,517)  (41.5%)

Most bearish reading of the year: (14,517) - 05/04/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercial traders added slightly to longs and maintained their
short positions, while small traders added slightly to longs and
covered shorts.


Commercials   Long      Short      Net     % of OI
04/12/04       23,501    22,748      753       1.6%
04/20/04       24,156    22,009    2,147       4.7%
04/27/04       23,676    22,009    1,667       3.6%
05/04/04       24,296    22,181    2,115       4.6%

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
04/12/04        6,136     7,450   (1,314)    (9.7%)
04/20/04        5,997     9,631   (3,634)   (23.3%)
04/27/04        5,998     8,868   (2,870)   (19.3%)
05/04/04        6,262     8,155   (1,893)   ( 9.2%)

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

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


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The Option Investor Newsletter                 Thursday 05-13-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: LTR
Call Play Updates: ADP, JNJ
New Calls Plays: LXK
Put Play Updates: AMZN, CTX, WHR, APOL, GM, MSTR
New Put Plays: CAKE, MBG


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

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


CALLS:
*****

Nonw


PUTS:
*****

Loews Corp - LTR - close: 58.24 change: +1.34 stop: 57.75

Thursday, LTR bounced on 1.7 times average daily volume, handily
taking out our newly lowered stop.  As we mentioned in Tuesday's
write-up, LTR had been holding to the support offered by the 100-
dma, several times piercing it, but always closing above it.
LTR's failure to replicate MO's behavior, with MO another company
among the seven named in the DOJ's case again the tobacco
companies, began worrying us.  That's what prodded us to begin
encouraging play participants last week to set stops according to
the losses they were incurring in their options positions due to
lost volatility and time premium, in addition to any stops we had
set according to the stock's price.  Those creeping movements are
deadly to options prices.

We also lowered the stop aggressively so that the play would be
stopped the moment LTR showed any strength.  It displayed that
strength Thursday.  While it's possible that LTR could find
resistance at the trendline of lower highs from its daily chart,
near $60.50, Wednesday's doji on big volume and then today's rise
on big volume smelled to us of capitulation followed by buying as
all sellers were flushed out.

Picked on May 03 at $ 57.74
Change since picked: + 0.50
Earnings Date      04/29/04 (confirmed)
Average Daily Volume:   419 thousand
Chart =



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

Auto. Data Proc. - ADP - close: 45.83 change: -0.44 stop: 43.25

After a bullish start to the week, shares of ADP stalled near the
$47 level and have been pulling back on light volume.  The fact
that the stock couldn't really continue higher without a pullback
is probably due to price hitting the top of the long-term rising
channel.  What is encouraging is the way the stock has been
holding above the $45 level, demonstrating that old resistance is
being turned to new support.  Strong support in the $44-45 area
is reinforced by the 10-dma ($45.43), 20-dma ($45.10) and 30-dma
($44.83).  That gives us the confidence to buy rebounds from this
support area in anticipation of a return to the top of the
channel and hopefully a breakout in the near future.  With daily
oscillators turning down though, we don't really need to be in a
hurry to initiate new positions.  The setup will be more
attractive if we can get a test of that support at the same time
that daily Stochastics are    once again turning up from within
oversold territory.  Stops should be maintained at $43.25 for
now.

Picked on May 9th at         $46.03
Change since picked:          -0.20
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.04 mln


---

Johnson & Johnson - JNJ - close: 54.93 change: -0.31 stop: 52.75

We stated at the outset that JNJ was unlikely to be a fast-moving
play and it has certainly lived up to that advance billing.
After just a bit of bullish follow-through early this week, the
stock has fallen back into a consolidation pattern.  Price is
holding firm near the $55 level, while the 20-dma ($54.37) rises
to reinforce support near $54.50.  At the same time, the daily
oscillators are turning downwards.  Look for a successful rebound
from above $54 to coincide with the oscillators beginning to turn
up from oversold (preferably in the middle of next week) as the
logical point for opening new positions.  While JNJ isn't likely
to soar upwards in rapid fashion, neither is it likely to move
against us in volatile fashion.  Target longer-term entries on
the pullbacks and look for a rally up near the $60 level.  Stops
should be maintained at $52.75.

Picked on May 9th at         $55.30
Change since picked:          -0.37
Earnings Date               4/13/04 (confirmed)
Average Daily Volume =     7.23 mln



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

Lexmark Intl. - LXK - close: 94.03 change: +1.86 stop: 89.75

Company Description:
Wrapping its arms around the entire life-cycle of printers, LXK
develops and manufactures a broad range of laser, inkjet and dot
matrix printers for the office and home markets.  The company is
also the exclusive source for new print cartridges for the laser
and inkjet printers it manufactures.  Additionally, LXK provides
supplies for IBM printers and offers after-market laser
cartridges for the large installed base of a range of laser
printers sold by other manufacturers.

Why we like it:
Continuing to set itself apart from the rest of the broad market,
LXK is once again in the process of a strong rebound from its
supportive 50-dma ($90.62).  Over the past several months, the
stock has repeatedly found strong support at the 50-dma, and each
rebound from that average has led the stock to break out to new
multiyear highs.  After topping out at $97 in early April, the
stock has gone through a healthy consolidation phase, working its
way back down to strong support at $90 and Tuesday's rebound from
that level held the possibility of another solid rally attempt.
The bulls delivered on that possibility over the past 2 days,
with the stock jumping on strong volume.  Today's rally above the
$94 level broke both the short-term descending trendline and
issued a new PnF Buy signal, complete with a bullish price
objective of $103.

With the stock having already given a solid breakout signal, we
have no need of an entry trigger on the play.  Aggressive traders
can enter the play on a breakout over today's $94.38 high,
looking for follow-through up to the April highs at $97.  Those
traders looking for a better entry point can target a mild
pullback towards the $92 level as their catalyst to open new
positions.  While the PnF chart says the $103 level is a viable
target, we'll set our sights a bit lower, looking for a trade at
$100 as the signal to harvest gains on the play.  Support looks
very strong near the $90 level, so we'll set our stop initially
at $89.75, just under the 50-dma, as well as the intraday lows of
the past month.

Suggested Options:
Shorter Term: The May $90 Call will offer short-term traders the
best return on an immediate move, as it is currently in the
money.  But with May options expiring next week, the June strikes
probably are the wiser choice.

Longer Term: Aggressive longer-term traders can use the June $100
Call, while the more conservative approach will be to use the
June $95 Call.  Our preferred option is the June $95 strike, as
it is currently near the money and should provide sufficient time
for the play to move in our favor.

! Alert - May options expire next week!

BUY CALL MAY- 90 LXK-ER OI=2404 last traded @ $4.60
BUY CALL MAY- 95 LXK-ES OI=2738 last traded @ $1.25
BUY CALL JUN- 95*LXK-FS OI= 344 last traded @ $3.40
BUY CALL JUN-100 LXK-FT OI= 382 last traded @ $1.55

Annotated Chart of LXK:



Picked on May 13th at        $94.03
Change since picked:          +0.00
Earnings Date               4/19/04 (confirmed)
Average Daily Volume =     1.06 mln



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Amazon.com - AMZN - close: 43.61 chg: +0.59 stop: 44.75

Before beginning the discussion of AMZN's trading pattern, I
wanted to note that different quote sources displayed a different
closing value for AMZN.

Thursday, AMZN continued the bounce off the midline support of
its descending regression channel on average volume.  Other
Internet-related stocks such as YHOO and ASKJ also posted gains,
although YHOO's was minimal, while the $RLX, the retail index,
lost ground.

So how much danger attends this play now?  While AMZN bounced,
producing a solid white candle, the rising formation still fits
the parameters of a bear flag formation.  Although AMZN also
closed above the 10-dma, the first time it's done so since 4/28,
the bounce stopped squarely at the 50-dma and below the bottom of
the early April gap.  The play is in danger of being stopped on a
continued bear-flag bounce, but we were encouraged to see these
signs.  We were also encouraged to see that although stochastics
punched up above the signal line and RSI hooked up, MACD remains
flat.

We would not encourage new plays at this time.  Although this
looks like a bear-flag rise, it could instead be a rise back
toward the top of the descending regression channel.

Picked on May 02 at $ 43.60
Change since picked: - 0.01
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   8.4 million
Chart =


---

Centex Corp - CTX - close: 45.24 change: +0.44 stop: 49.35

Since Tuesday, CTX has continued higher, with that move
accompanied by volume only 60 percent of average daily volume.
We counseled that those waiting for the ideal bounce-and-rollover
entry into CTX be particularly watchful of volume patterns, and
this one delivers just what we want to see.

Now CTX just has to deliver that rollover entry.  We're watching
for a bounce up to and rollover from $46-47, with a 50 percent
retracement of the last flagpole plunge at about $46.77.
Although some might also consider any rollover entry from below
the 200-dma, we'd like to see CTX turn down below that 50 percent
retracement or from a level that overshoots it by only a little.

U.S. 30-year mortgages reached an eight-month high Thursday, at
6.34 percent, according to one headline.  Ten-year yields, linked
to mortgage rates, bumped above a long-term resisting trendline,
but created a small-bodied candle that gapped above that
resistance.  That means that the yield perhaps just overshot that
trendline and might turn down below resistance again, giving some
relief to interest-rate-sensitive sectors, something we don't
want to see happen. Despite today's rise in the ten-year-yields
and the reported highs in the mortgage rates, the DJUSHB, the Dow
Jones US Home Construction Index, posted gains, although the
daily candle looked anything but strong as it clung to the 200-
dma.  Still, those considering a play in CTX would hope to see
the DJUSHB tumble below that 200-dma.

So far, so good, and we hope we're getting close to our ideal
entry in this play.

Picked on May xx at $ xx.xx (See rollover entry.)
Change since picked: - x.xx
Earnings Date      04/20/04 (confirmed)
Average Daily Volume:   2.0 million
Chart =


---

Whirlpool Corp - WHR - close: 64.44 chg: +0.32 stop: 65.76

Although Thursday's rise in WHR was accompanied by higher-than-
normal volume, we did find some encouraging signs when examining
the daily chart.  That wasn't one of them, of course, as bear
flags should be accompanied by smaller-than-normal volume.
Neither was it encouraging to see WHR move above and close over
the 10-dma, something it hadn't done since the middle of April.

Encouraging signs included the small-bodied candle formed at
resistance.  That resistance is composed of the recent horizontal
resistance at $65.00, as well as the trendline of the H&S-ish
formation on its weekly chart, with that neckline now at about
$64.70.  A small note of encouragement came from RSI, trying to
flatten even as WHR rose.

Of course, the potential for a reversal signal, hinted at by that
small-bodied candle at the top of this week's rise, must be
confirmed by a bearish red candle forming below Thursday's
candle.  Tuesday, we suggested that traders might consider new
entries on rollovers beneath $65.00, but cautioned that any rises
toward that level should take place on lower-than-normal volume,
rather than the higher-than-normal volume seen on Wednesday and
Thursday's bounces.  Because of that higher-than-normal volume,
we would not suggest new entries at this time.  We will
reevaluate this weekend after observing Friday's action.

Picked on May 05 at $ 64.69
Change since picked: - 0.25
Earnings Date      04/21/04 (confirmed)
Average Daily Volume:   555 thousand
Chart =


---

Apollo Group - APOL - close: 90.75 change: +1.15 stop: 96.50

Performing exactly as we scripted it, APOL is continuing its
rebound from the 50-dma ($88.32) and is right on course for a
retest of strong resistance in the $92-93 area.  Oscillators are
turning up nicely and price  should reach that resistance just
about the time the oscillators are topping out in overbought
territory.  Then it will simply be a matter of entering the play
on a rollover from that resistance at the same time that the
oscillators begin to turn down.  Of course, traders that would
prefer to enter on weakness can certainly entertain breakdown
entries on a drop under the $87.50 level, but that is not our
first choice.  Once below the 50-dma and $87.50, we'll look for a
rapid decline down towards our $81 target (also the PnF price
target), with the possibility of a near-term bounce off of mild
support at $85.  Maintain stops at $96.50 for now.

Picked on May 11th at         $90.32
Change since picked:           +0.43
Earnings Date                6/11/04 (unconfirmed)
Average Daily Volume =      1.71 mln


---

General Motors - GM - close: 44.15 change: -0.33 stop: 47.25

No matter how you slice it, the rebound in shares of GM after the
breakdown under $44 has been tepid.  When we initiated coverage
on the stock, we were looking for a rebound back to at least the
200-dma ($45.44) to set up rollover entries and the best the
bulls have been able to manage is a light volume move to just
above $45.  For most of the past few days, the stock has been
consolidating in a sideways manner and the possibility exists
that another breakdown may be the best entry point we get.  But
with the daily oscillators trying to turn up, we'll still hold
out hope for a rollover entry in the $45.50-46.00 area.  All of
the shorter term moving averages have turned down and are
clustered in the $46-47 area and should provide very strong
resistance to any stronger rebound attempt.  Traders preferring
to take the breakdown entry should use a trigger of $43.40, just
under yesterday's intraday low.  Maintain stops at $47.25.

Picked on May 9th at          $44.60
Change since picked:           -0.45
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =      5.20 mln


---

MicroStrategy Inc. - MSTR - cls: 45.01 chng: +0.58 stp: 48.05

Our MSTR play has certainly offered a volatile ride this week,
with a drop to nearly $42, a surge back above $46, another
selloff down to $43 and then today's failed rebound that stalled
just below $46.50.  The stock is building a consolidation pattern
in the $43-46.50 area and when price breaks from that range, we
can expect that it should have some power behind it.  Daily
oscillators are creeping higher, but certainly not in a strong
manner.  The lack of strength can be seen in the volume metrics
as well, as volume is markedly lower on the rally attempts and
higher on the down days.  It was encouraging today to see the way
price reversed from just below the 10-dma ($46.62) and traders
still looking for entries should do well by stepping aboard on
these failed rebound attempts near $46.  Recall that our final
target for the play is at $40,breakdown entries don't make a lot
of sense.  We'll maintain our stop at $48.05 tonight, but more
conservative traders may want to use a tighter stop just over the
10-dma.

Picked on May 6th at          $47.02
Change since picked:           -2.01
Earnings Date                4/27/04 (confirmed)
Average Daily Volume =         414 K



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

Cheesecake Factory - CAKE - cls: 40.10 chng: -2.30 stp: 44.10

Company Description:
The Cheesecake Factory operated 61 upscale, full-service, casual
dining restaurants under The Cheesecake Factory mark in 20 states
and the District of Columbia as of March 3, 2003.  The company
also operated three upscale casual dining restaurants under the
Grand Lux Cafe mark in Chicago, Illinois, Los Angeles,
California, and Las Vegas, Nevada, as well as one self-service,
limited-menu, express foodservice operation under The Cheesecake
Factory Express mark inside the DisneyQuest family entertainment
center in Orlando, Florida.  It also operated a bakery production
facility in Calabasas Hills, California, which produces baked
desserts and other products for its restaurants and for other
foodservice operators, retailers and distributors. It also
licensed three bakery cafes under The Cheesecake Factory Bakery
Cafe mark to another foodservice operator.

Why we like it:
The past couple months have not been kind to food-related stocks,
especially those that don't cater to the increasingly popular
Atkins diet.  Stocks like PNRA and KKD have been pummeled in
recent weeks and we can add CAKE to the list of victims.  The
stock has had a string of sharp selloffs since topping out near
$49 in early March.  The rebound from the March selloff produced
a lower high near $48 and then the bears started to get
aggressive.  A big gap down following its earnings report last
month sent the stock plunging below its 100-dma and after a
couple weeks of consolidation, the weakness started to intensify
again, with CAKE falling to test its 200-dma ($41.41) earlier
this week.  That measure of support was smashed this morning,
with the stock plunging below $40 on very heavy volume.  The
buyers did manage to put in a feeble rebound near the end of the
day, but by then the damage was done, creating a Spread Triple
Bottom Sell signal on the PnF chart.  That sell signal brings
with it a tentative bearish price target of $31, underscoring
that there's still substantial downside risk in the stock.

Despite that weakness and gloomy prediction for future price
action, we are NOT recommending entries on further weakness.  The
reason is that the PnF bullish support line rests at $39 and we
are expecting a rebound from this first test of that support.
Instead, we want to focus our attention on the subsequent
rollover from resistance, which ought to occur in the vicinity of
the $42 level.  Between the 200-dma and strong historical
resistance (broken support) in the $42-43 area, we have a high-
odds zone for targeting new bearish entries.  Once below the $39
level, we can expect to see support come in at $38 on the way to
our $36 target for the play.  Initial stops will be set at
$44.10, just over the recent consolidation highs.

Suggested Options:
Since we're looking for a rebound entry and May options expire
next week, there really isn't enough time for a profitable play
using front month options.  Consequently, we've only listed June
strikes for the play.  Aggressive traders can use the $40 strike,
while the more conservative approach will be to use the in-the-
money $45 strike.  Our preferred option is the June 45 strike, as
it is currently in the money and should provide ample time for
the play to move in our favor.

! Alert - May options expire next week!

BUY PUT JUN-45*OAQ-RR OI= 1168 last traded @ $4.10
BUY PUT JUN-40 OAQ-RQ OI=  408 last traded @ $2.45

Annotated Chart of CAKE:



Picked on May 13th at         $40.10
Change since picked:           +0.00
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =         554 K


---

Mandalay Resort Group - MBG - cls: 50.97 chng: -1.49 stop: 53.21

Company Description:
Mandalay Resort Group, founded in 1974 as Circus Circus
Enterprises, Inc., is in the business of entertainment, with its
core strength in casino gaming. The company's asset base,
operating cash flow, profit margin, multiple markets and customer
counts rank it as a gaming industry leader.  (Source:  Company
Website.)

Why We Like It:
Early in May, Merrill Lynch downgraded MBG to a neutral rating
from its previous buy rating.  Saying the "best was behind us,"
the firm said that the rest of 2004 and all of 2005 might see
growth rates for casino and hotel companies slowing.  Although
Deutsche Bank had reiterated its buy rating in mid-April,
investors' opinions and price action appeared to be more in
harmony with Merrill Lynch's opinion. Since hitting its April
high of $62.20 on April 6, MBG has tumbled, with volume building
as it declines.  That tumble created a P&F double-bottom
breakdown on the P&F chart in late April. This week, candles have
been congregating at the 100-dma, but now look ready to tumble
below it, perhaps all the way to a test of the 200-dma.  We're
going to trigger this play with a trade at $50.43, just below
Thursday's low.  We're targeting $46.25, and will set an initial
stop at $53.21 if this play is triggered.

Those considering this play should consider some important
possible support levels, especially since MBG's decline has
already been so steep.  Those levels must include the
psychologically important $50.00 level, of course.  The 30-week
average, one closely watched by some market old-timers, lies at
$49.18.  In addition, the 38.2 percent of the rally off the 2003
low lies at $47.49, with that level also perhaps providing
support and possible bounce potential.

Suggested Options:
Open interest is about equal for all these put options
surrounding MBG's current price.  Our preference would be for the
JUN 47.50 or 50 strikes.

! Alert - May options expire in two weeks !

BUY PUT JUN 47.50 MGB-RW OI= 1614 Last traded @ $1.05
BUY PUT JUN 50.00 MGB-RJ OI= 1465 Last traded @ $1.85
BUY PUT JUN 55.00 MGB-RK OI= 1968 Last traded @ $4.80

Annotated Chart for MBG:



Picked on May xx at $ xx.xx (See Trigger)
Change since picked: - x.xx
Earnings Date      06/03/04 (confirmed)
Average Daily Volume:   1.7 million
Chart =



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The Option Investor Newsletter                  Thursday 05-13-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: A Boring Day on the Markets
Option Spreads: Makin’ Money – Keepin’ It -- & Makin’ More!
Traders Corner: Key Reversals and other signs of a recent bottom


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

A Boring Day on the Markets
_________________________________________________________________

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.
_________________________________________________________________

Kindred Healthcare - KIND - close: 47.81 change: -0.54

What to Watch:  KIND is in bad health, trying to hold onto the
$46.80 horizontal support and its 200-dma, below at 45.81.  The
P&F chart confirms our diagnosis, with a downside target of
$34.00.  Because of weekly support near $38-39, we wouldn't
suggest hanging on for that downside target, however, but might
even suggest a target just over round-number support at $40.00.
We would definitely suggest following the stock lower with stops
if inclined to hang on through a test of $40 or that $38-39
weekly support.  Earnings were 4/26, but those considering a
bearish play should be aware that the stock is set for a 2 for 1
split to be distributed 5/27 to shareholders of record 5/10.  We
would suggest an entry either on a rollover beneath the 50-dma or
on a move below Tuesday's low.

Chart=


---

Panera Bread - PNRA - close: 33.45 change: -4.42

What to Watch:  PNRA reported earnings Thursday, with dairy costs
being behind trimmed earnings.  Saying the declines were
overdone, Sidoti & Co upgraded the stock to a buy rating.  That
buy rating might help it regain some of those lost points.  We
hope so, because we're looking for a bounce back up to resistance
near $34.75-36.00 and a rollover from there for a bearish entry.
We would not suggest entries so close to earnings or just after
such a steep fall, but list this for traders to watch as it
digests some of those losses for a rollover entry.  The P&F
target is $23.00, but we would suggest setting a target closer to
27.50, just above the 200-week moving average.  Note that there's
some weekly support in the $31-32 range.

Chart=


----

Guidant Corp  - GDT - close: 61.85 change:  +0.94

What to Watch:  We've listed this stock on this page before, but
noted Thursday the way it stopped its advance at the 21-dma.  The
rise was on low volume.  The weekly chart depicts a H&S so
perfect that we can't believe that it won't confirm.  That's a
possibility, however, so we'd suggest a trigger.  If confirmed,
that H&S has a downside target at $45.00.  The P&F target is at
$50, with the bullish support line way below that, at $45.00,
showing some correlation with that H&S target.  In addition, the
weekly 200-ma crosses just below $45.00.

On the way down, we note some weekly support just under $57.00,
but strongest weekly support is near $52.15, and we'd suggest
that players plan on exiting the position before that level is
reached and before the psychologically powerful $50.00.  Because
the 50 percent retracement of GDT's rally lies at $59.10, we
would suggest an entry on a move below the 200-dma, with a trader
entering at that point being prepared for a bounce or a several-
day consolidation along that important MA.

Chart=


---

Zebra Technologies  - ZBRA - close: 77.50 change:  +1.78

What to Watch:  Wednesday, ZBRA broke out above a recent
consolidation zone, achieving another new high.  It sports a P&F
buy signal with a target of $89.00.  Best entries on a long play
would be on tests of the 30-dma.  Because ZBRA has been in a
strong trend and is reaching new highs, key stops to important
MA's, too, such as the 50- or 100-dma, according to an account-
appropriate risk level, and follow ZBRA higher as it rises.
Those considering this play should be aware of two risks.  One is
that ZBRA looks quite extended on the weekly chart, making a
breakout move a risky one to trade.  Another is related to ZBRA's
low ADV, at 274,000.  That low ADV can exaggerate moves.  ZBRA
reports some time on July 22-23.

Chart=



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

Makin’ Money – Keepin’ It -- & Makin’ More!
By Mike Parnos, Investing With Attitude

You wake up.  It’s 3 a.m.  You’re dripping with perspiration.
You’ve had a dream – a vision.  Not your usual dream.  No Carmen
Electra.  No fur-lined handcuffs, silk sheets or Reddi-wip.

Oddly enough, you had a premonition that George W. announced the
capture of Osama Bin Laden (right before the election, of course).
He was found in New Jersey, disguised as a Manager of a 7-11
(Osama, not George W.).  On the news, the market spiked up, but
not before you were able to buy 4 SPX calls.

Managing A Profitable Position
Why the perspiration, you ask?  Herein lies the dilemma.  A
substantial profit is staring you in the face.  You’re not used to
making money because you’re a directional trader.  But, even a
blind squirrel finds an acorn now and then.  The question: Do you
take profits?  Do you stay for more?  Oh, the indecision of it
all.  Take two Valium and call me in the morning – and read this,
before the market opens.

In the meantime, let’s spend some time exploring a few of the ways
to manage a profitable position.  Get some rest before you read
this.  Lots of numbers.  It’s even OK to take a pill.  Never fear;
we’ll work on your chemical dependencies later -- after you’ve
made a lot of money.

Setting The Scene
Last month, when the SPX was trading at 1120, you bought two of
the May SPX 1120 calls for $23.50 ($4,700).  In the two weeks, the
SPX moved up to 1140.  Below is the option chain for the May SPX
calls.

Strike                   Bid        Ask
May 1120 call           33.50      34.50
May 1130 call           28.50      29.50
May 1140 call           23.50      24.50
May 1150 call           18.00      19.00
May 1175 call            8.50       9.50

Grab & Run
Take Your Profits.  Hey!  You guess right.  Your spent $4,700 for
your May 1120 calls.  Now they’re worth $6,700 ($33.50 x 200).
You can grab your $2,000 profits and go on a vacation.  Now that
you’re rich, call Carmen Electra.  Maybe she’ll go out with you.
Remember, she married Dennis Rodman, so, obviously, she’s not too
picky.  If you have body piercings, your chances are even better.

Bull Call Spread
Are there more profits to be had?  How much are you willing to
risk to find out?  How can you lock in some profits, but still
participate in additional upward movement?  Let’s convert part of
your trade into a bull call spread.

a)  Sell one of your two calls and take $3,350 off the table.
Your total initial investment was $4,700.  All that remains at
risk is $1,350 ($4,700 - $3,350).  Now, you still have one May
1120 call remaining.   If you think that the SPX still has further
to go, you can sell the May SPX 1150 call, take in $18.00 ($1,800)
and position yourself to participate in a possible additional ten
points of upward movement.  (see option chain above)

By taking in the $1,800, you have effectively locked in $450 on
the entire position.  If the SPX closes beyond 1150, your
remaining 1120 call will have a value of $30 and you will have a
potential total profit of $3,450 ($3,000 + $450).

b)  You would also take profits on one of the 1120 calls.  Then,
if you’re more aggressive, instead of selling the 1150 call, you
could sell the 1175 call.  You’d take in $8.50 ($850), reduce your
risk to $500 ($1,350 - $850), and position yourself to participate
in the next 35 points of upside.  If the SPX finishes over 1175 at
May expiration, your 1120 call would be worth $55 and you’d take
in $5,000.  Your potential profit would then be $5,000 less the
remaining $500 of risk = $4,500.  That would require a substantial
move, but stranger things have happened.

c)  You could sell the 1150 call on BOTH of your 1120 calls and
take in $3,600 ($18.00 x 200).  Your risk would then be only
$1,100.  If the SPX continues its rise and finishes above 1150,
you’ll be in great shape.  Your two 1120 calls would be worth a
total of $6,000 ($30 x 200).  Your net profits would then be
$4,900 ($6,000 - $1,100).

d)  You could just hold onto the 1120 calls – and pray.  This
technical name for this strategy is: S-T-U-P-I-D.  Why?  Because
you’re not only risking your $2,000 profit, but also your original
$4,700.  Will you have the self-discipline to adhere to a trailing
stop?  Who are you kidding?  Get serious.  Take your profits.
There is no re-hab for stupidity.

Yin vs. Yang
What would a CPTI student do?  Well, I’m torn between grabbing the
entire $2,000 profit and bull call spread choice “c.”  As you
probably know by now, I believe that directional trading is akin
to coin-flipping.  If you subscribe to the Yin-Yang philosophy,
you know that for every good thing that happens, something bad
will happen.  For every $2,000 profit you make in directional
trading, something will happen to balance it out.  You probably
won’t lose an appendage or suffer a paper cut.  It will be
something in between – and it won’t be pretty.

More To Come
Today’s discussion has covered only a few alternatives of how to
manage a profitable position.  There are more choices that we will
discuss in future columns.  However, for now we’re in danger of
information overload and are nearing the point of diminishing
returns.  We’ve dealt with your dream.  We may not find Osama in
New Jersey, but hopefully you now have more insight into how to
handle profits – just in case.  I thought I saw Osama last month
at a Burger King in Kalamazoo.  Or, maybe that was Elvis.  You
know how easy it is to confuse the two.
________________________________________________________________

MAY CPTI POSITIONS
A little over a week to go to expiration.  It’s been a long five-
week option cycle.  We’ve exercised amazing patience.  Let’s hope
the market cooperates and rewards our patience – and discipline.

May Position #1 – SPX Iron Condor – 1096.44
We sold 10 SPX May 1080 puts and bought 10 SPX May 1070 puts for a
total credit of $1.90 ($1,900).  Then we sold 7 SPX May 1175 calls
and bought 7 SPX May 1190 calls for a credit of  $1.40 ($980).
Our total net credit and potential profit is $2,880.  Our maximum
profit range is 1080 to 1175.  Maintenance: $10,500.

May Position #2 – RUT Iron Condor – 547.17
We sold 10 RUT May 620 calls and bought 10 RUT May 630 calls for a
credit of $1.20 ($1,200).  Then we sold 10 RUT May 540 puts and
bought 10 RUT May 530 puts for a credit of $1.30 ($1,300).  Our
total net credit and profit potential is $2,500.  Our maximum
profit range is 540 to 620.  Maintenance: $10,000.

May Position #3 – MNX Iron Condor - $141.71
We sold 10 MNX May $152.50 calls and bought 10 MNX May $157.50
calls for a credit of $.80 ($800).  Then we sold 10 MNX May $140
puts and bought 10 MNX May $135 puts for a credit: $.95 ($950).
Our total net credit and profit potential is $1,750.  Our maximum
profit range is $140 to $152.50.  Maintenance: $5,000.

May Position #4 – BBH Iron Condor - $148.05
We sold 10 BBH May $155 calls and bought 10 BBH May $165 calls for
a credit of $.70 ($700).  Then we sold 10 BBH May $135 puts and
bought 10 BBH May $125 puts for a credit of  $.70 ($700).  Our
total net credit and profit potential is $1.40 x 10 contracts =
$1,400.  Our maximum profit range is  $135 to $155.  Maintenance:
$10,000.
______________________________________________________

ONGOING POSITIONS

QQQ ITM Strangle – Ongoing Long Term -- $35.01
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We make
money by selling near term puts and calls every month.  Here's
what we've done so far:
Oct. $33 puts and Oct. $34 calls – credit of $1,900. Nov. $34 puts
and calls – credit of $1,150. Dec. $34 puts and calls – credit of
$1,500.  Jan. $34 puts and calls – credit of $850.  Feb. $34 calls
and $36 puts – credit of $750. Mar. $34 calls and $37 puts –
credit of $1,150. Apr. $34 calls and $37 puts – credit of $750.
May $34 calls and $37 puts – credit of $800.  Total credit:
$8,850.

Note:  We haven't included the proceeds from this long term QQQ
ITM Strangle in our profit calculations.  It's a bonus!  And it's
a great cash flow generating strategy.

ZERO-PLUS Strategy.  OEX – 536.23
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
investment.

Long Term: Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 =
$24,300)
March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930)
March: 535/525 Bull Put spread for credit of $1.10 (x 300 = $330).
Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560
calls for $1.35.  A credit of $1.25 x 300 = $375.00.  Bought back
March 560 calls for $.15, locked in profit of $120 x 3 = $360.
Cash position is $3,320 ($1,620 plus the unused $1,700).  Our cash
position as of April expiration is $2,640 plus unused $1,700 =
$4,340.

The April 570 OEX call and the OEX 515/505 bull put spread expired
worthless.

New May Zero Plus BPS Position
We sold 5 OEX May 530 puts and buy 5 contracts of May 520 puts for
credit of  $1.10 (x 5 contracts = $550).

We sold a call against our long 540 call. We sold 5 OEX May 575
calls for $1.40 (x 5 contracts = $700).  Today (Thursday), when
the market tanked, we bought back the May 575 call for $.15 ($75).
This locked in $1.25 profit on the 575 call.  Then, we still have
two weeks left, so we sold 5 of the May 560 calls for $1.15
($575).

If these plays work out, we can add another $1,175 + $575 ($1,750)
to our cash total – just a little bonus while we wait for the
market to go up.

OSX Calendar Spread Plus - $98.40
OSX is the Oil Index. This is a play on the common belief that oil
prices will continue to move up over the next month or two. Bought
10 OSX June $115 calls (36 delta) and sold 10 OSX April $115 calls
(23 delta) at a cost of $2.15 ($2,150). We also put on an April
$100/$90 bull put spread and took in an extra $.70 ($700) to
reduce the cost basis to $1.45 ($1,450). We rolled out our April
$115 call and took in $1.20 - further reducing our cost basis to
$.20. Then, aggressive traders (which we are in this strategy) put
on the May $100/$90 bull put spread and took in $.95. So, now we
are a "plus" $.75. In the best-case scenario, the OSX will finish
just below $110 at May expiration.
__________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, first look under "Education" on
the OI home page and click on "Traders Corner."  For more recent
columns, you can look under “Strategies” and click on
“Combinations.”  They're waiting for you 24/7.
______________________________________________________

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

Mike Parnos
CPTI Master Strategist and HCP
______________________________________________________

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


**************
TRADERS CORNER
**************

Key Reversals and other signs of a recent bottom
By Leigh Stevens
lstevens@OptionInvestor.com

I was watching the market yesterday (Tuesday, 5/12/04) when the
major indices fell to new lows for the recent decline and then
rebounded substantially off intraday lows.  You could be watching
the evening news and hear that the Dow for example, was up 25
points and not think anything remarkable was going on, but there
was.  And there were definite signs of at least an interim bottom
if not "the" low for the recent correction, as suggested by
different patterns that formed and different indicators.

I'll go through these various patterns and indicators and suggest
what I anticipate finding technically when a significant reversal
occurs – this apparent recent reversal was to the upside, but the
same conditions, patterns and indicators would hold for a
downside reversal; e.g., a move to a new high, followed by an
immediate decline and close below the prior day's low.

KEY REVERSALS –

Some reversal patterns are formed in only 1-2 sessions of
whatever time duration (e.g., hourly, daily, weekly) being
watched and you may hear the term "key" upside or downside
reversals used for these situations.  Sometimes a price spike,
where the high or low is noticeably above or below the close,
warns of a trend reversal.  Certain candlestick patterns that
form in one session are anticipated to mark a trend reversal;
e.g., the "hanging man" or "hammer".  At the opposite extreme are
patterns that form over an extended duration such as are
described in technical analysis as "broadening" tops or bottoms.

The discussion here is of the type called key reversals on a bar
(or candlestick) chart, measuring the High, Low and Close (HLC)
or most commonly the Open as well (OHLC charts).

A strong sign of a trend reversal and which is often the start of
a intermediate or long-term trend change is the formation of 1 or
2-day key reversals.  By the way, the definition of a key
reversal is only loosely defined in technical analysis.

For example, the most common definition of what is usually called
a reversal up day or reversal down day and also sometimes called
a "key reversal up" or "key reversal down" day:

1. Reversal up day – a day where there is a lower intraday low
than the prior day, followed by a close above the prior day’s
CLOSE.  Such days are fairly common and I resist calling this set
of conditions, a "key" reversal – in fact, there is no agreed
upon textbook definition of what exactly makes a reversal a
key reversal.  I learned it one way, others another way.

2. Reversal down day – a day where there is higher high than the
prior day, followed by close that is below the prior day’s close.

What I consider to be a more significant and what makes a
reversal a KEY reversal, either up or down, is this definition:

1. Key Upside reversal – a day (or hour, week, etc) where there
is a lower low than the prior "bar" or prior two bars AND the
close is above the high of the prior bar or the prior 2 trading
periods.

I will use an example on the daily charts for this so will start
to say "day" instead of "bar" – the point being that reversal
patterns occur on intraday charts like 15, 30 or 60 minutes, and
on daily, weekly and monthly charts.

2. Downside key reversal day: a day where there is a higher
intraday high than the prior day (same as the above "reversal
down" definition) OR prior 2-days AND the CLOSE is below the
prior day’s LOW (a 1-day key reversal down) or, of the prior 2-
days (a 2-day key reversal down).

The key reversal term does tend to be applied most often to a
daily time frame or daily chart.

The pattern of a move to new low, followed by a reversal that is
above the prior day's HIGH doesn't happen as often and is often
then a more definitive sign for a reversal.  And, that is what
occurred with the Dow Average in this view on the Daily chart –




The fact the last LOW here was substantially below the prior low
is reinforcing for the upside key reversal.  Significant tops and
significant bottoms are emotional events and are often extreme.
Selling accelerates as more and more traders and investors dump
stock, UNTIL there it (the selling) gets "exhausted". Short-term
traders sense this and start covering short positions and there
is a rapid rebound.

LOOK FOR MULTIPLE SIGNS OF A REVERSAL

Next is another chart of the same Index, or the Dow average in
this case, showing more historical data along with some
indicators and other highlights of other patterns –

The first thing to note is that the reversal occurred in the area
of a prior top of significance as can be seen at the dashed green
line.  Here comes the old adage that: 1. Support (once broken)
"becomes" resistance (later on) and 2. Resistance becomes
Support.  Prior sellers in this area, realizing their "mistake"
in selling too soon, are happy buyers in the same area once this
index gets back to the same (price) area.




200-DAY MOVING AVERAGE –
This is a key average in stocks for institutional money managers
especially.  As long as the longer-term outlook for stocks
remains favorable (it is) there is a tendency for buying stocks
when an average or index dips under its 200-day moving average.

There was only ONE close below the 200-day moving average, which
is hard to see on the chart above, but it was on the left most
bar in the 3-days that are within the yellow circle.

CHECK FOR AN OVERSOLD/OVERSOLD EXTREME –
The Dow reached my "classic" level for an oversold extreme, where
the 14-day Relative Strength Index (RSI) as seen above, got to
the lower line with a reading at 30.  Sometimes and in some
markets, the level that I might use for "oversold" level will be
at or around 25. (This is common in commodity markets.) I tend to
go with the figure in the major stock indices that has marked
prior lows in recent weeks or months.


LOOK AT OTHER INDEXES

Examining the other Indexes related to the Dow 30 (INDU) and
going back to my discussion above about 1 and 2-day key
reversals, a 2-day upside key reversal is apparent in the S&P 500
Index (SPX) per the close up of recent days action in the chart
below –

With SPX there is a new intraday low, followed by a close above
the prior 2-days high making it, in a sense, an even "stronger"
indication of a significant upside reversal.





IS THE INDEX BOTH OVERSOLD AND IN A PRICE AREA TYPICAL OF A
BOTTOM?

It is one thing to see oversold readings on the oscillator type
indicators like the RSI and Stochastics, but another to see that
AND also use a simple 21-day (at center) average and the 3%
envelope lines and see that recent lows were at the lower
envelope.  These trading envelopes or bands often marks the upper
and lower boundaries of the S&P trading range, as seen in the
chart below -




There is a complete explanation of the construction, use and the
interpretations I make of moving average envelopes for the
Indexes that can be found at –
http://www.OptionInvestor.com/traderscorner/tc_022604_2.asp


IS THERE AN EXTREME OF BULLISH OR BEARISH "SENTIMENT"?

YES, big time here.  The extreme is the amount of equity put
volume on a daily basis relative to call volume on the CBOE. A
nearly equal level of put volume relative to total equities call
volume is highly correlated or associated with a bottom within 1-
5 trading days.

This is seen in the chart above – with my custom indicator (i.e.,
not found elsewhere), not only on a 1-day basis which is enough
to suggest a bottom is near but also on 5-day moving average
basis as shown in the magenta line tracking the 1-day reading
(blue line).

There is a complete explanation of the construction, use and the
interpretations I make of my call to put indicator for the
Indexes that can be found at –
http://www.OptionInvestor.com/traderscorner/tc_021904_2.asp


Good Trading Success!


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