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Daily Newsletter, Wednesday, 05/19/2004

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The Option Investor Newsletter                Wednesday 05-19-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Despite Being Primed, the Pump Runs Dry
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)
*******************************************************************
     05-19-2004            High     Low     Volume Advance/Decline
DJIA     9937.71 - 30.80 10093.21  9933.11 1.88 bln   1472/1365
NASDAQ   1898.17 +  0.35  1936.04  1898.16 1.79 bln   1613/1449
S&P 100   532.28 -  1.54   540.70   532.28   Totals   3085/2814
S&P 500  1088.68 -  2.81  1105.93  1088.49
RUS 2000  540.86 -  1.70   552.75   540.01
DJ TRANS 2836.71 -  5.65  2885.16  2830.92
VIX        18.93 -  0.40    18.93    17.58
VXO        19.37 -  0.45    19.48    17.60
VXN        26.09 -  1.66    27.19    24.75
Total Volume 4,169M
Total UpVol  2,161M
Total DnVol  1,930M
52wk Highs      74
52wk Lows      184
TRIN          1.00
PUT/CALL      0.80
*******************************************************************

Despite Being Primed, the Pump Runs Dry
Linda Piazza

With the NYMEX crude contract easing back toward $40.00 as U.S.
markets opened, the pump was primed for market gains.  Asian
markets had realized those gains, also helped by tech strength
and reassurances out of China.

Despite a cautionary statement from a Merrill Lynch analyst that
Hewlett Packard's (HPQ) revenue gains came to the detriment of
pricing, HPQ's earnings resulted in tech gains in overseas
markets, helped along by news out of the semi-related stocks.
Samsung Electronics posted a 5.6 percent gain after forecasting a
computer memory-chip shortage this year.  STMicrolectronics (STM)
predicted that 2004's industry sales would expand by 30 percent.
European chip-equipment companies benefited from the higher-than-
expected sales from Applied Materials (AMAT) although Wednesday
morning saw UBS Warburg downgrading AMAT and the semi-production
industry to a neutral rating.

In addition, China reassured markets made jittery at the thought
of a rate hike and a possible hard landing.  Vice Premier Huang
Ju said that preliminary results of some measures were already
being felt.  Another report showed that foreign investments in
China had slowed, also easing fears that China would be forced to
raise rates to cool its economy.  Around the globe, metals
rebounded.  The Nikkei and DAX climbed back above their 200-
dma's.

Our futures climbed, too, and the upside promised by the pre-
market futures levels was soon delivered.  The Russell 2000
gapped up to 545 on the open, headed up to a 10:15 high of
552.75.  The SPX soared in the first five minutes of trade,
reaching 1,100 by the 9:45 five-minute candle.  The Nasdaq opened
at 1,917.58, gapping above 1,900 on its way to an early morning
high of 1,936.04. Within the first five minutes of trade, the DOW
had climbed above 10,000 on its way to an early morning high of
10,093.

The pump might have been primed, but it was about to run dry.
Midmorning, the American Petroleum Institute (API) released
figures for crude, gas, and distillate stocks, noting that
inventories increased for that period, with petroleum deliveries
rising 4.8 percent over the same month last year.  The Energy
Department disputed the figures, saying that crude stocks fell by
1.1 million barrels.

John Felmy, chief economist for the API, discussed the rise in
crude oil prices with a reporter from Marketwatch.com, mentioning
the record prices in crude oil and gasoline and near-record
levels for diesel fuel.  His comments urge caution against
pinning too many hopes on the informal OPEC meeting to begin this
weekend, as he suggested that there isn't a lot of excess
production capacity.   Only Saudi Arabia has the ability to
increase production, he noted, and that increase would not be a
large one.  OPEC raised its demand forecast, and Felmy noted the
strong growth in China and U.S. was keeping demand high.  Felmy
also remarked that history shows that U.S. consumers don't change
behavior until they perceive an increase to be permanent, at
which time they change driving habits, choose different cars, and
make lifestyle changes.  That hasn't happened yet, according to
Felmy, but with many speaking of $40.00 as being a floor for
crude oil prices rather than the ceiling that it once was,
consumers may begin that critical shift in thinking that Felmy
mentions.

The process may have begun, with Continental Airlines announcing
a hike in fares and possible wage and job cuts to offset the
increasing cost of fuels.  A late-day headline announced that
American and United matched Continental's planned fare hikes.

Many indices had already seen their highs of the day.  As they
were hitting those highs, crude oil was hitting its low of the
day, punching below $40.00 to $39.90 before rebounding.

Annotated 5-minute Chart of Light, Sweet Crude Oil:



The effect of that test of $40.00 and the subsequent bounce was
obvious on the five-minute chart of the Dow Jones Transportation
Index.

Annotated 5-Minute Chart of the TRAN:



By the end of the day, the SPX had lost 0.26 percent; the Russell
2000, 0.31 percent; the Dow, 0.31 percent; the TRAN, 0.20
percent, and the NDX, 0.08 percent.  The Nasdaq eked out a 0.02
percent gain, but closed beneath 1900.  Breadth patterns showed
advancers leading the decliners by an 18:15 ratio on the NYSE and
a 17:15 ratio on the Nasdaq, with total volume at 1.5 billion on
the NYSE and 1.8 billion on the Nasdaq.  Volume had reportedly
been low during the morning's climb, sounding a warning that the
climb might not be supported.

Weak sectors included the HMO, the Morgan Stanley Healthcare
Index; the XAL, the Airline Index; the DJUSHB, the Dow Jones US
Home Construction Index, and the BTK, the Biotechnology Index.
Not all sectors lost ground, however.  The SOX gained 0.97
percent; the INX, the CBOE Internet Index, 1.19 percent; and the
NWX, the AMEX Networking Index, 1.78 percent.  Other gainers
included telecoms, gold, iron and steel, and the XBD, the
Securities Broker Dealer Index.  HPQ, credited along with AMAT
with sending techs higher across the globe in overnight trading,
closed higher by 3.63 percent, but AMAT tumbled 1.11 percent.

The day's trading pattern left troubling long upper shadows on
many candles.  If those candles had been formed at the top of a
rise, they would have been dubbed shooting stars and would have
been possible reversal signals, but their formation in the midst
of a consolidation zone eliminates some of the bearish
implications.  It was just last Wednesday that I discussed
hammers formed in the midst of the same consolidation patterns,
and the way that their bullishness was erased by their positions
within those patterns.

Let's look at how much damage the day's trading produced,
beginning with the S&P 500.

Annotated Daily Chart of the SPX:



The SPX remains above its 200-dma, still mired in the congestion
zone that has captured it throughout much of April.  While
Wednesday's candle does not have the same bearish implications
that it would if produced at the top of the climb, it may
nevertheless be suggesting another test of the 200-dma.  Although
the MACD histogram grows less negative, also watch the value of
the MACD lines, as they're on the verge of moving lower and
erasing the bullish price/MACD divergence that has been present.

Annotated Daily Chart of the Nasdaq:



Despite gains made in the SOX and several other tech sectors, the
Nasdaq's daily candle was not a bullish one, and may be
predicting another test of support.

Annotated Daily Chart of the Dow:



The Dow's chart shows some of the same characteristics seen on
others.  The day's candle was anything but bullish, but was
produced from within a consolidation zone and so might only be a
part of the normal back-and-forth of such a zone.  As was true on
other charts, the bullish price/MACD divergence, so cheering to
bullish traders, could be erased with a strong downdraft or even
several more days of lower prices.

Annotated Chart of the Russell 2000:



The Russell 2000's pattern looks somewhat better formed than that
seen on other charts, and its formation is that of a possible "b"
distribution formation.  Unlike what is seen on several other
charts, no bullish price/MACD divergence exists on this chart.
Even a likely "b" distribution pattern must be watched for a
downside or upside break, however.

All these charts show indices mired in congestion zones that may
or may not break this week.  With OPEC holding an informal
meeting beginning this weekend and with option expiration week
rapidly drawing to a close, the effort to hold indices steady may
continue through the end of the week.  Determining when
breakdowns or upside breaks will have occurred has been made more
difficult by the broadening or spiky nature of some of the
consolidation patterns.  Watch for MACD levels to dip on some
indices, erasing that bullish price/MACD divergence, as one guide
to market behavior.  For guidance, market watchers might also pay
special attention to the price of crude, watching for new highs
or a downturn below $40.00 again, a move that might spike a
relief rally.  In addition, keep an eye on the yields for the
benchmark Ten-Year Treasury Note.  After piercing the neckline of
a reverse H&S formation, yields fell below that line again, but
are now headed higher again.  Another pullback might ease
pressure on equities, while a push above that neckline and then
above recent highs might apply more pressure.

Annotated Daily Chart of the TNX:



From this vantage point ahead of tomorrow's open, it appears that
monumental efforts have been made to hold indices above key
support and may continue to be made.  If fund flows are negative
this week, as Jim postulated they might be based on his
observations of selling patterns today, then those efforts might
be swamped, but that remains to be seen.

In after-hours news, Intuit and Brocade both traded lower after
releasing earnings reports, with Intuit beating expectations but
saying that it would lose 6-10 cents per share in Q4, a greater-
than-expected predicted loss.  Brocade met expectations according
to early reports but announced that it would reduce its work
force.

Economic reports due Thursday include the usual weekly initial
claims, with forecasts ranging from 326-330,000, with the
previous number at 331,000.  That number will be released at 8:30
EST.  The Conference Board releases the April's Leading
Indicators at 10:00 EST according to one report and earlier
according to another, with estimates for the expected gain
ranging from 0.1 percent to 0.2 percent.  The prior number stood
at 0.3 percent.  Since most of the data comprising this report's
data base has been previously announced, this number doesn't
usually prove to be market moving.  Perhaps of more interest will
be May's Philadelphia Fed report to be released at noon, with the
forecasts I've seen ranging from 30.5-33 against April's 32.5.

It's difficult to know what catalyst might break the indices out
of their current consolidation zones, but due to the spiky,
broadening nature of those zones and to this being opex week,
enter trades with care, making sure that the risks taken or
contracts entered are account-appropriate ones.


************
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_051904_1.asp


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The Option Investor Newsletter                Wednesday 05-19-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: CTX
Dropped Calls: None
Dropped Puts: MBG, MSTR
Watch List: Rejected Again


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*****************
STOP-LOSS UPDATES
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CTX - put
Adjust from $49.35 down to $47.50

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

None


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

Mandalay Resort Group - MBG - cls: 52.45 chng: -0.59 stop: 53.21

A testament to the wisdom of using entry triggers, our MBG play
makes its way to the drop list tonight without ever having hit our
trigger.  The bears certainly gave it an honest effort, the there
wasn't enough selling pressure to generate the breakdown we were
looking for and over the past few sessions, the stock has been
moving higher.  Today's early rally activated our stop and despite
the selloff that lasted right into the close, we have no choice
but to drop the play tonight.  This may turn out to be the
precursor to the downward move we were expecting, but we'll have
to make that determination when we see whether the bears can take
out the lows just over $50.40 on the second attempt.

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


---

MicroStrategy Inc. - MSTR - cls: 47.02 chng: +1.62 stp: 47.00

At the close of trading yesterday, MSTR had the potential to go
either way on a break from its recent consolidation.  The bulls
won the battle, with the stock surging sharply higher this
morning, as the stock pushed above the $49 level, before selling
off with the rest of the market to end just a couple pennies above
our $47 stop.  Clearly, based on the break from the recent
consolidation, we're dropping the play tonight.  Traders that
failed to exit on the early strength should look at the drop back
towards the $47 level as a good opportunity at a secondary exit
point.

Picked on May 6th at          $47.02
Change since picked:           -0.00
Earnings Date                4/27/04 (confirmed)
Average Daily Volume =         417 K




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

Rejected Again

Zebra Technologies Corp. - ZBRA - close: 78.48 change: +0.98

WHAT TO WATCH: As though ignorant of the weakness that has been
prevalent in the broad market, shares of ZBRA just keep pushing to
new highs in continuation of the year-long bullish trend.  That
pattern repeated this morning, with the stock pushing through the
recent highs just below $78.  Look for a pullback near the $75-76
area to provide the best entries into the play, using a stop just
below the 50-dma.

Chart=


---

Lennar Corp. - LEN - close: 41.62 change: -1.46

WHAT TO WATCH: We've had our eye on shares of LEN, looking for
this weak Housing stock to finally break support near $42 to
signal the next downward leg was in progress.  That breakdown
occurred today, with the stock breaking down on rising volume
after the recent rollover from just below the 10-dma.  Entries
look favorable either on continued weakness or on another failed
bounce below the 10-dma.  Target an initial move down to the $38
support level, with potential for a continued slide to stronger
support near $35-36.

Chart=


---

S P X Corp. - SPW - close: 40.99 change: -0.61

WHAT TO WATCH: Bit by bit, shares of SPW have been edging closer
to a significant breakdown and today's close just under $41 looks
bad for the bulls.  Should this support level really break, we can
look for the stock to trade down towards support in the $35-36
area.  Use a trigger of $40.80 for entry and then trail stops just
above the 10-dma.

Chart=


---

Cephalon Inc. - CEPH - close: 51.71 change: -1.71

WHAT TO WATCH: It was another rough day for the Biotechnology
bulls and CEPH took a big plunge below support.  That support near
$52.50 didn't even slow the drop this morning and the stock fell
sharply at the close, ending near its low of the day.  Support is
likely to be found near the 200-dma on the first attempt, so we
don't want to chase the stock lower.  Look for a failed bounce in
the vicinity of $53 to offer solid entries ahead of downside
continuation that should extend down to the $48 level.

Chart=



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

AET $79.00 - After the large drop in late April and early May, AET
has been trying to put together some sort of rally.  But all the
bulls have managed is to build a bear flag, which is riding along
the 100-dma.  This pattern looks like t could break down any day
now.  Aggressive traders can look to play the downside on a break
of the bottom of the flag pattern, while the more conservative
approach would be to wait for a break under $76.75, which would
take out the recent lows.  Look for a drop first to the $72.50
area and then a test of the 200-dma near $70.

RYL $73.21 - Just one more Housing stock that isn't looking
healthy, RYL appears to be failing in its most recent rebound
attempt.  The stock rolled over near $75, right at the 10-dma and
looks ready to take a serious run at the lows from early May.  Use
a trigger below $71 and target a drop towards the $65 support
level.


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