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Daily Newsletter, Thursday, 05/20/2004

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The Option Investor Newsletter                Thursday 05-20-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Tie Game
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: All Quiet


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      05-20-2004           High     Low     Volume   Adv/Dcl
DJIA     9937.64 -  0.07  9970.64  9900.59 1.47 bln 1893/1374
NASDAQ   1896.59 -  1.60  1912.02  1890.18 1.54 bln 1330/1798
S&P 100   533.20 +  0.92   534.92   531.28   Totals 3223/3172
S&P 500  1089.19 +  0.51  1092.62  1085.43
W5000   10578.93 +  5.70 10613.65 10542.79
SOX       453.88 -  3.90   461.05   451.49
RUS 2000  540.75 -  0.11   544.05   538.02
DJ TRANS 2830.12 -  6.60  2849.24  2818.95
VIX        18.67 -  0.26    19.25    18.55
VXO (VIX-O)19.36 -  0.01    20.11    19.05
VXN        25.54 -  0.55    26.31    25.51
Total Volume 3,277M
Total UpVol  1,453M
Total DnVol  1,766M
Total Adv  3630
Total Dcl  3607
52wk Highs   45
52wk Lows   212
NasTRIN    1.02
TRIN       1.66
PUT/CALL   1.21
************************************************************

Tie Game
by Jim Brown

If you added the closing point changes for the day on the
Dow, Nasdaq, S&P-100, S&P-500, Wilshire-5000, Russell-2000
and the SOX you get +1.45 points for the day. In any measure
the markets were as neutral as possible on very low volume
of barely three billion shares across all markets. Today
they opened the markets and nobody came.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


SPX Chart - 5 min




The markets recovered significantly off the closing lows
last night with some positive action in the futures before
the open. The Jobless Claims jumped to 345,000 for last week
and +15,000 over consensus estimates. This knocked some of
the bloom off the rose before the cash open could capitalize
on those gains. The prior week was revised up slightly to
333K. The four-week moving average still fell to 333,500,
the lowest level since the recovery began. Initial weekly
claims have fallen to 2000 levels and should be predicting
an eventual  rate of unemployment under 4%. North Carolina
had the largest number of claims. Most were from the textile
and apparel sector where outsourcing is still a major factor.
The slight bounce in claims over the last two weeks could be
suggesting a Jobs gain in the June 4th report will be in the
175,000 range.

The best report of the day was the Chicago Fed National
Activity Index which jumped sharply from 0.23 to 0.64 and
a five-month high. 57 of the 85 indicators in the CFNAI
contributed gains to the headline number. Employment added
+0.18 to the headline number and its largest contribution
in four years. The leading components were output related
items which added +0.35 to the overall index. The jobless
recovery appears to be adding jobs at a growing pace with
only a minor slowing for summer.

The worst report of the day was the Philly Fed Survey which
came in at 23.8, sharply down from April's 32.5. Consensus
estimates were for 31.5 and this was a significant change.
New Orders and Shipments dropped substantially although
back orders rose from -2.5 to 12.8 on the backlog in the
commodities. Inflation rose sharply in prices paid with a
+8 point jump but prices received jumped a whopping +15
points. This shows prices rising but so far manufacturers
are able to pass those prices on to buyers. The market took
a dip on the news for the only real move of the day but did
recover almost immediately. The prices paid component was
the highest level since 1998.

The only other report, Index of Leading Indicators, was
inline with estimates at +0.1% but well below the +0.8%
from March. The large jump in interest rates was the main
culprit. This is old data despite the title "Leading" and
was ignored.

The price of oil rose to the highs again this morning at
$41.65 but closed back down at 40.80. The minor dip came on
various comments about increased production by OPEC. They
are meeting in Amsterdam this weekend to discuss the current
production limits. There are multiple rumors that one or
more countries will agree to raise the limit by 1.5M bbls
per day to help ease the crisis. Considering they are
already producing and selling more over the current limit
than 1.5M per day they may actually agree to ship less than
they are currently shipping but appear to appease the critics.
With oil at 41.50 the urge to cheat is so strong that nobody
expects any reduction in the current over production levels.

The current oil prices are having more of an impact to the
U.S. economy than multiple Fed rate hikes according to some
analysts. At the current $40+ levels over $50 billion of
consumer spending cash will evaporate this year. A survey
released this morning showed that 21% are buying fewer
clothes, 27% are eating out less and 31% are planning on
curtailing travel. This is a far stronger impact to the
consumer than any Fed rate hike series.

Airlines were the topic of the oil debate today when the
actual loss numbers due to high prices were released. At $30
oil the loss for the year from the major U.S. carriers was
placed at $800 million. At $41 that loss will rise to $3.2
billion. They have already proven to be unable to raise
rates or apply fuel adjustment charges due to the very
strong competition on the most heavily traveled routes.
These high prices will force the airlines to dip into much
needed cash reserves and will ruin the remaining health of
the airline industry. Just the term "airline cash reserves"
evokes a stunned expression from most since most have no
reserve.

Bush was asked again today about the oil going into the
strategic petroleum reserve. His comments were right on the
money in my opinion. He said the threat of a terror attack
on U.S. oil transportation, storage or production facilities
could put us at risk of a major problem ahead. The reserves
are for times of a national emergency not for price controls.
If we allowed the reserves to be drawn down for convenience
sake and something did happen then there would be a call to
hang him for not protecting the country. He also said using
the reserves to reduce prices in an election year could be
seen as a political ploy to gain votes. Since the other side
is already frying him on the airwaves for not releasing oil
I am not sure that last argument works but I admire him for
sticking his plan to build the defensive stockpile despite
the political attack. With all the bad press politicians
have been getting for not seeing 9/11 coming I can't blame
anyone for trying to be prepared for future problems.

The Semiconductor Book-to-Bill report was released late
tonight and it only rose to 1.14 for April from 1.10 in
March. March was revised down to 1.09 from 1.10. New
bookings rose +15.7% from $1.378B to $1.594B. Shipments
rose from $1.268 to $1.401B (+10.4%). These numbers are all
three month moving averages. Semi.org does not release the
individual monthly numbers to keep the erratic flows from
influencing the market. That means a +15.7% jump in bookings
was probably more in the +20% to +25% range in order to
cause such a sharp jump in the 3-mo average. The number
last month only rose +4% suggesting March was nearly flat
or even down to offset the gains from the prior two months.
I have probably confused everyone but the bottom line was
a very strong jump in bookings for April. Don't expect
much market movement from this release because the late
(6:PM) timing tends to see the report ignored.

TrimTabs.com released their fund flows for April and said
there were +$21 billion in inflows into equity funds. When
you consider the Dow hit a high of 10534 on April 27th there
was no material downtrend apparent. April had actually seen
a significant recovery from the march lows of 10007. May
however has been nearly a straight downtrend since that
April-27th high. We have traded at 9900 or lower for three
days of the last two weeks. One more leg down and the cash
flows for May could be really negative.

The Fed heads were out in force today with McTeer making
multiple appearances. He continued to parrot the company
line of measured hikes but the more he talked the more it
became possible that they may not hike in June. This rate
hike is going to drive the analysts nuts. After one speech
they start leaning to +50 points and somebody else speaks
and they start thinking no hike. The problem appears to be
an economy that is not as robust as people think. The oil
price challenge is also weighing on the recovery. Inflation
may be rising but several Fed heads today went out of their
way to say they did not expect it to be a problem and that
it would remain in check. Bernanke, Mr. printing press
himself, echoed those thoughts that economic conditions
have tightened and the risk of inflation had lessened.
McTeer was asked if given the current environment and the
oil problem would the Fed have to hike at all. He of course
said the Fed would keep an open mind until the meeting and
refused to speculate. When asked if a blowout Jobs report
would force an earlier Fed hike than June he said not likely.
When asked what might force the Fed to move he said a really
bad inflation report but he did not see that on the horizon.
Bottom line again, no hike until June-30th OR LATER.

The Dow closed yesterday just over 9940 and other than the
post Philly Fed dip to 9900 we traded in a 30 point range
around that 9940 number all day and closed at 9941. The
9930-9960 range was completely lifeless and completely the
opposite of the monster ramp/decline on Wednesday. Traders
are not chasing price up or down and based on the very low
volume they are just content to maintain a bid at support
to prevent a meltdown.

The Nasdaq has spent so much time at 1900 that number is
about to burn in on my monitor. The Nasdaq traded in only
a 19 point range today with the midpoint exactly 1900. The
NDX has become fixated on 1400 as we await option expiration.
The markets are so lackluster it is amazing especially when
you remember the eruption on Wednesday.

There are no material economic reports on Friday or Monday
and while Friday is option expiration I think most of the
volatility has passed. We appear to be locked in a trading
range on the Dow between 9900-10050 and 1880-1935 on the
Nasdaq. Key support is the 200dma on the SPX at 1081 and
that is the key to our future. I think it is too optimistic
to assume we will continue to trade sideways until June
30th. At some point we are going to go directional again
and I think  the bulls would like to see one more big drop
to really flush the rest of the weak holders before bargain
hunting for a post Fed rally. If that is going to happen
then I think my target of 9600 I have had since December
will come to pass. That would require a break of the SPX
200dma at 1081 and that would be my recommended trigger
for recognizing the event.

For Friday I would still recommend a neutral stance as
long as we hold over that SPX 1081 level. Expiration
Friday's tend to be boring and without an external event
to move the markets it might be a good day to start your
weekend early.

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_052004_1.asp


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

All Quiet
- J. Brown
Thursday turned out to be a relatively quiet session with very
light volume numbers and the major indices closing within two
points of unchanged.  Overall the tone seemed cautious ahead of
tomorrow's options expiration and no one really expects any
fireworks ahead of the weekend without any major economic reports
due out on Friday.

Today's economic data was negative.  The weekly initial jobless
claims showed a rise to 345,000.  This was a negative surprise
but nothing to be alarmed about.  The Philly Fed index was the
major report today and that was discouraging.  Economists were
looking for a dip from 32.5 last month to 31.0 in May.  Today's
report came out at 23.8.  Now in the past few months bad economic
news was good because it meant the FOMC would hesitate to raise
rates.  Now that the Fed has already signaled that rates would
need to rise soon bad economic news is just that - bad.

Most of the sector indices followed the major averages and closed
relatively unchanged with the XAL airline index as the major
exception.  The airlines rallied 2.77% on the strength in Delta
shares, which soared 15.8% on an upgrade.

Market internals were mixed to negative with advancers outpacing
decliners 4 to 3 on the NYSE but losing 17 to 13 on the NASDAQ.
Down volume outweighed up volume on both exchanges by a couple of
hundred million shares each.

According to the Stock Traders Almanac the Dow has been down on
May's option expiration five out of the last seven years. Given
this week's tone of the market it wouldn't surprise me to see
another down day.



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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8416
Current     :  9937

Moving Averages:
(Simple)

 10-dma:  9994
 50-dma: 10260
200-dma: 10037



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  912
Current     : 1089

Moving Averages:
(Simple)

 10-dma: 1092
 50-dma: 1117
200-dma: 1081



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1103
Current     : 1396

Moving Averages:
(Simple)

 10-dma: 1402
 50-dma: 1435
200-dma: 1419



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

CBOE Market Volatility Index (VIX) = 18.67 -0.26
CBOE Mkt Volatility old VIX  (VXO) = 19.21 -0.16
Nasdaq Volatility Index (VXN)      = 25.54 -0.55


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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.21        642,507       778,148
Equity Only    1.02        432,627       440,072
OEX            1.09         48,442        52,967
QQQ            7.18         16,290       116,959


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

Bullish Percent Data

           Current   Change   Status
NYSE          61.8    + 0     Bear Confirmed
NASDAQ-100    30.0    - 1     Bear Confirmed
Dow Indust.   66.7    + 0     Bear Confirmed
S&P 500       57.6    + 0     Bear Confirmed
S&P 100       61.0    + 0     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: 0.76
10-dma: 0.97
21-dma: 1.23
55-dma: 1.15


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    1617      1310
Decliners    1225      1724

New Highs      24        52
New Lows       46        84

Up Volume    630M      614M
Down Vol.    818M      865M

Total Vol.  1462M     1502M
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 increased their open interest be equivalent
amounts both long and short, while small traders went
net shorter.


Commercials   Long      Short      Net     % Of OI
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%)
05/11/04      401,365   421,672   (20,307)   (2.5%)

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
04/20/04      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%
05/11/04      135,534    76,987    58,547    27.5%

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 were much more active in the e-mini S&P
contracts, reducing their shorts slightly and
dramatically increasing longs, flipping to net long
for the first time in at least 4 weeks.  Small
traders took the other side of the trade, reducing
longs and increasing their net short position.


Commercials   Long      Short      Net     % Of OI
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%)
05/11/04      378,696   362,887     15,809     2.1%

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
04/20/04      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%
05/11/04      101,199     94,408     6,791     3.5%

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


NASDAQ-100

Commercials added slightly to their net short position,
while small traders reduced both shorts and longs but
favoring the long side, reducing their overall net short
position.


Commercials   Long      Short      Net     % of OI
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%
05/11/04       57,680     37,410    20,270   21.3%

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
04/20/04        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%)
05/11/04        9,716    21,072   (11,356)  (36.9%)

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

Commercials increased their net long position, while
small traders took the other side of the trade,
increasing longs and reducing shorts.


Commercials   Long      Short      Net     % of OI
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%
05/11/04       22,614    21,507    1,107       2.5%

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
04/20/04        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%)
05/11/04        7,009     7,640   (  631)   ( 4.3%)

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 05-20-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: ADP, ERTS, JNJ, LXK
New Calls Plays: BCR
Put Play Updates: AMZN, APOL, CAKE, CTX, GM, WHR
New Put Plays: GDT


****************
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:
*****

None


PUTS:
*****

None


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option* and futures traders. The combination of the proven Man
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success.

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

Auto. Data Proc. - ADP - close: 44.27 change: -0.19 stop: 43.25

We've been patient with our ADP play, and unfortunately it
appears this is a case when the patience was unwarranted.  After
pushing to the top of its rising channel near $47 early last
week, the stock has pulled back and is now in danger of falling
out of its bullish trend.  Already below the midline of that
channel, the stock dipped to kiss its 50dma this morning before a
quick bounce back over $44, before a quiet consolidation into the
end of the day.  It looks like the stock will be kept pinned near
$45 into expiration tomorrow, and then we'll see what's in store
next week.  Our stop at $43.25 still appears to be in the right
place and aggressive traders can certainly use the current
weakness to establish new positions.  But we'd prefer to see a
rebound back over the $45 level (clearing the past few days'
intraday resistance before initiating new positions.  Note that
the daily Stochastics has now reached fully oversold and could be
ready to turn up, so the bulls may yet manage to pull the fat
from the fire.

Picked on May 9th at         $46.03
Change since picked:          -1.76
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.06 mln
Chart =


---

Electronic Arts - ERTS - close: 48.32 change: +0.34 stop: 47.00

Well, that wasn't quite how we wanted to see our new ERTS play
get started.  The stock got pummeled yesterday and actually
closed fractionally below $48, issuing that new PnF Sell signal
in the process.  That development pushes this play a bit higher
on the risk spectrum as we're now attempting to pick a bottom in
a stock that is bearish in terms of its supply/demand chart.  But
if there's a place to engage in such activity, this appears to be
it, given the strong support at $48, both historically and from
the 200dma ($47.68) and the rising trendline, which is now right
at the 200-dma.  Aggressive traders can consider buying the dip
here, although we'd prefer to see more of a rebound first,
preferably with a move back over the 100-dma ($48.92).  With
option expiration tomorrow, it is very likely that we'll have to
wait for any strong directional movement.  Maintain a tight stop
at $47.

Picked on May 18th at        $49.60
Change since picked:          -1.28
Earnings Date               4/29/04 (confirmed)
Average Daily Volume =     3.87 mln
Chart =


---

Johnson & Johnson - JNJ - close: 54.58 change: +0.30 stop: 52.75

We knew at the outset that JNJ would be a slow-mover and we
planned accordingly, but this is a bit ridiculous.  The stock
slipped back under its breakout level and has been trading
between $54-55 all week on relatively light volume.  It sure
seems like the stock is being pinned to that $55 strike ahead of
options expiration tomorrow.  While we don't expect to see any
directional movement before next week, these intraday dips near
$54 do seem to be offering a favorable entry into the play and
daily oscillators are now hinting at an upward turn, possibly
early next week.  It is encouraging that there hasn't been any
major price weakness while the daily oscillators have
transitioned back towards oversold and that hints of underlying
strength.  Traders with a more conservative approach will want to
see JNJ break back over $55 before initiating new positions.
Maintain stops at $52.75.

Picked on May 9th at         $55.30
Change since picked:          -0.72
Earnings Date               4/13/04 (confirmed)
Average Daily Volume =     7.23 mln
Chart =


---

Lexmark Intl. - LXK - close: 91.70 change: -0.55 stop: 89.75

Despite a volatile ride, our LXK play ended the day today just
about where it started the week, just under $92.  We saw an
attempted selloff near the $9 level on Monday, followed by an
attempted breakout over $94 yesterday, both of which failed
completely.  The reactions to those attempted directional breaks
shoved the stock right back into the middle of the range, and now
we should expect more of the same tomorrow with options
expiration figuring large in traders' minds.  So long as LXK
holds in this range ahead of the weekend, we should be able to
look for solid entries near the 50-dma early next week.  Of
course, as we've noted before, conservative traders will want to
wait for some sign of strength with a move back over the $94.50
level before playing.  We'll maintain our stop at $89.75.

Picked on May 13th at        $94.03
Change since picked:          -2.33
Earnings Date               4/19/04 (confirmed)
Average Daily Volume =     1.07 mln
Chart =



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

Bard C R - BCR - close: 110.00 chg: +2.45 stop: 106.00

Company Description:
C. R. Bard, Inc. (www.crbard.com), headquartered in Murray Hill,
N.J., is a leading multinational developer, manufacturer, and
marketer of innovative, life-enhancing medical technologies in
the fields of vascular, urology, oncology, and surgical specialty
products. (source: company press release)

Why We Like It:
It's been tough to find really enticing bullish play candidates
lately with the markets so weak the past few weeks so we've
decided to add BCR based on its relative strength.  The company
reported earnings on April 20th and smashed the estimates of
$1.03 with $1.19 per share.  The stock soared on the earnings
news and a 2-for-1 stock split announcement.  Since then we've
seen the stock consolidate those gains over the past month with
new support at the $105 level.  The gradual trend higher over the
last two weeks has now brought it back to the $110 level.  Its
MACD is about to produce a new buy signal and its faster momentum
oscillators are already pointing higher.

Now we will admit that BCR does look overbought, especially on
its weekly chart.  Yet there has been virtually no weakness the
past ten days even as the Industrials darted under the 10K mark.
There is also clear resistance at the $112 level and more
conservative traders may want to wait for BCR to trade and/or
close above this level.  The stock is set to split 2-for-1 on May
28th and begin trading split adjusted after the Memorial day
holiday when the markets open on June 1st.  BCR could see a
steady pre-split run up into this date.  Traders should also
remember that any options you hold over the split will have their
symbols change along with their strikes, value and open interest.
If you own one $110 call before the split you'll own two $55
calls after the split with the appropriate change in value.  We
are starting the play with a stop loss at $106.00.

Suggested Options:
Short-term traders will probably do best with June or July calls.
We're going to suggest the June's, especially the $110's, which
will become $55s after the split.

BUY CALL JUN 105 BCR-FA OI= 91 Last traded @ $6.50
BUY CALL JUN 110 BCR-FB OI=114 Last traded @ $3.20
BUY CALL JUN 115 BCR-FC OI=246 Last traded @ $1.25

Annotated Chart:



Picked on May 20 at $110.00
Change since picked: + 0.00
Earnings Date      04/20/04 (confirmed)
Average Daily Volume:   386 thousand
Chart =



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PLAY UPDATES - PUTS
*******************

Amazon.com - AMZN - close: 40.98 chg: -0.71 stop: 44.05 *new*

So far so good.  As mentioned in Tuesday's update the Blue Nile
IPO (symbol NILE) was a potential drag on shares of AMZN as
investors may have been rotating money out of AMZN and into the
new online jeweler NILE that began trading today.  Yet this may
be just an excuse to take money off the table.  The INX Internet
index and the NASDAQ still look weak.  AMZN's intraday spike
yesterday looked like another great bearish entry point for any
traders nimble enough to take it.  The stock is quickly
approaching the $40.00 level, which should be psychological
round-number support.  We're suggesting shorter-term traders
consider taking profits here and longer-term traders tightening
their stops.  Fortunately, AMZN's point-and-figure chart
continues to look very bearish and points to a $32 price target.
We're going to lower our stop to $44.05.

Picked on May 02 at $ 43.60
Change since picked: - 2.62
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   8.4 million
Chart =


---

Apollo Group - APOL - close: 88.26 change: -0.99 stop: 92.00*new*

What a difference a couple days can make!  APOL shot higher with
the rest of the market yesterday morning and after almost hitting
$91 rolled over in spectacular fashion.  That weakness persisted
today and the stock finally gave us something we can sink our
teeth into -- a close under the 50-dma ($89.22), it's first since
last November.  Adding credence to the move and suggesting that
it is the beginning of the breakdown we've been watching for is
the fact that volume has been on the rise over the past two days.
Aggressive traders got a nice entry yesterday on the failure at
the 10-dma, and conservative traders look like they may get their
chance tomorrow if the stock breaks its recent lows and trades
below $87.50.  The fly in the ointment for that break occurring
tomorrow is the fact that we have options expiration, which may
result in a pop back towards the $90 level heading into the
weekend.  If APOL does break down ahead of the weekend, that will
just be another point of confirmation as to the weakening
condition of the stock.  At this point, it seems prudent to
tighten our stop, so we're lowering it to $92, just over the
recent failed bounces, as well as the 20-dma ($91.43) and 30-dma
($91.83), both of which are now curling downwards.

Picked on May 11th at         $90.32
Change since picked:           -2.06
Earnings Date                6/11/04 (unconfirmed)
Average Daily Volume =      1.72 mln
Chart =


---

Cheesecake Factory - CAKE - cls: 38.18 chng: -1.38 stp:
41.00*new*

After four days of attempting to put in a bounce, CAKE finally
caved in today and shattered the recent lows, going out on its
low of the day.  Volume was very strong today, adding emphasis to
the breakdown and it looks like the downtrend is picking up some
momentum now.  Clearly any stock that is not Atkins-friendly is
being pummeled and CAKE is no exception.  Today's drop has the
stock very close to breaking the bullish support line ($39) on
the PnF chart, and a trade at $38 tomorrow will complete the job.
As we noted previously, there's potential support at $38, but
once that bullish support line is broken, the odds favor more
weakness down to our $36 target.  Any opex related bounce back
near the $40 level now looks like a favorable entry point into
the play, especially with the 10-dma ($40.76) bearish down on
that level.  Lower stops to $41 tonight, which is just over last
Friday's intraday high.

Picked on May 13th at         $40.09
Change since picked:           -1.91
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =         579 K
Chart =


---

Centex Corp - CTX - close: 44.05 change: +0.19 stop: 47.50

CTX is even weaker than we thought.  The stock has been unable to
penetrate minor resistance at the $46.00 level even as CSFB
reiterated its out perform rating yesterday.  Probably more
interesting to bearish traders is new talk of potential merger
deals brewing in the home construction sector.  That should be a
bullish cue for investors but the group isn't reacting to such
rumors.  CTX and the DJUSHB index continue to languish as
investors hesitate to put more money into such interest-rate
sensitive issues.  OptionInvestor.com is currently not
"triggered" in this play but more aggressive traders can use a
drop below last week's low at $43.31 as a potential entry point.
We'll re-evaluate our own entry point strategy for the weekend
newsletter.  A couple of homebuilders we do think look like
potential shorts are RYL and LEN.

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 =


---

General Motors - GM - close: 43.46 change: -0.18 stop: 46.75

The bulls made a valiant attempt at a rebound yesterday and GM
really tried to look bullish.  But based on the way the stock was
turned back from the 10-dma (now at $44.08), the bulls seem to be
running low on gas.  Yesterday's intraday reversal and close near
the low of the day looks particularly ominous and we could very
well see Monday's lows below $43 tested tomorrow.  There's no
question GM is likely to encounter some support near $42, but at
this point, it appears that the price action is being driven by
selling pressure, which has intensified since the PnF Sell signal
that was issued with the break under $44.  The halting rise in
the daily Stochastics while price is still falling definitely
looks bearish and we continue to believe failed bounces in the
$44-45 area present attractive entry opportunities.  It isn't
likely to get there all at once, but GM still looks entirely
capable of challenging the $40 support level and reaching our $38
target.

Picked on May 9th at          $44.60
Change since picked:           -1.14
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =      5.21 mln
Chart =


---

Whirlpool Corp - WHR - close: 64.03 chg: +0.50 stop: 65.76

The intraday rally in the Industrials on Wednesday lead to a
spike higher in shares of WHR too.  The appliance maker's stock
shot above resistance at $65.00 and its simple 21-dma to hit
$65.65, only 11 cents from our stop loss.  Fortunately, shares
fell steadily throughout the rest of the session to close under
the $64.00 mark.  Apparently investors are not concerned over
news that South Korean rival LG Electronics Inc. has filed a
patent lawsuit against WHR for some washing machine patents.
Traders may also want to note that WHR announced today that it
has won a court order against its steel supplier Ispat Inland.
Steel prices have soared in this country and Ispat wanted to add
surcharges to the steel WHR had ordered or they would stop
shipments.  The courts said Ispat would be forced to continue
providing steel to WHR per their existing supply agreement.  WHR
reiterated their earnings guidance on the news.  We find it
noteworthy that the stock didn't react very positively to this
good news.  We're still watching the $63.25-63.50 region as the
next hurdle for the bears.  Keep an eye on this range.

Picked on May 05 at $ 64.69
Change since picked: - 0.31
Earnings Date      04/21/04 (confirmed)
Average Daily Volume:   555 thousand
Chart =



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

Guidant - GDT - close: 57.11 chg: -1.40 stop: 60.26

Company Description:
Guidant Corporation is a world leader in the treatment of cardiac
and vascular disease. The company pioneers lifesaving technology,
giving an opportunity for better life today to millions of
cardiac and vascular patients worldwide. Driven by a strong
entrepreneurial culture of 12,000 employees, Guidant develops,
manufactures and markets a broad array of products and services
that enable less invasive care for some of life's most
threatening medical conditions. (source: company press release)

Why We Like It:
It looks like Guidant could be a candidate for one of its own
defibrillators soon.  The stock has steadily slipped lower over
the past several weeks and has now broken through two levels of
major support.  Earnings were in late April and the company only
met expectations while guiding lower for the second quarter and
that's never a good sign.  This week the company also announced
that its CEO would retire at the end of the year.  This is not
necessarily a problem if they have a strong succession plan in
place but it can still cause investor nervousness.  Yesterday
Citigroup's Smith Barney division initiated coverage on GDT with
a "sell".  The downgrade came out one day ahead of GDT's news for
its COMPANION study.  The company published its positive results
in the May 20th edition of the New England Journal of Medicine.
Yet still the stock failed to react positively.  Instead we're
seeing GDT fail at the $60 level of resistance on Wednesday and
break through its simple 200-dma in Thursday's trading.

Chart readers will also note the head-and-shoulders pattern over
the last 4-to-5 months.  The neckline was in the $59.40 area and
that has clearly been broken.  If the H&S pattern holds true then
bears could target the $47.50 region.  That's close to its
bearish P&F chart of $44.00.  We're going to open the play at
current levels with a stop at $60.26.  Our first target will be
$52.50 but the $50.00 level looks good too.

Suggested Options:
We like the June and July puts for this trade.  Our favorite
would be the June 60's but the 55's look good too.

BUY PUT JUN 60 GDT-RL OI= 655 Last traded @ $4.20
BUY PUT JUN 55 GDT-RK OI= 864 Last traded @ $1.60
BUY PUT JUL 60 GDT-SL OI=2453 Last traded @ $4.90

Annotated Chart:



Picked on May 20 at $ 57.11
Change since picked: - 0.00
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   3.1 million
Chart =



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The Option Investor Newsletter                  Thursday 05-20-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Insurance, Biotech and Dental
Option Spreads: A Sneak Peek At The New June CPTI Positions
Traders Corner: Moving Averages As Support & Resistance


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

Insurance, Biotech and Dental

___________________________________________________________________

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.
___________________________________________________________________


American Intl Group - AIG - close: 70.01 change: +0.46

WHAT TO WATCH: AIG, one of the newest additions to the Dow
Industrials, also happens to be one of the largest insurance
companies.  Not surprisingly the IUX insurance index and a chart
of AIG look very similar.  Both have been in a down trend the
past several weeks and thus look oversold while their MACD
indicators are suggesting a bullish turnaround could be in the
works soon.  Yet AIG is at a pivotal level near $70 and could go
either direction.  A breakdown under $68.75 and it could test its
200-dma.  A move over $72 and it could run back toward its highs.
AIG is one to watch.

Chart=


---

Biogen IDEC Ind. - BIIB - close: 60.65 change: +1.43

WHAT TO WATCH: Biotech firm BIIB has been charting its own course
and ignoring weakness in the BTK biotech index and DRG drug index
these last few days.  The stock came close to hitting new highs
on Thursday and closed over the $60.00 mark.  A move over $62.00
would be a new P&F buy signal and would be a potential entry
point for new bullish positions.  More aggressive traders may
want to consider positions now.

Chart=


---

Patterson Dental Co - PDCO - close: 70.49 change: -4.16

WHAT TO WATCH: PDCO reported earnings this morning before the
bell that were inline with expectations on a 20% jump in
revenues.  The company also issued a relatively bullish forecast
for the next quarter but investors still "sold the news".  The
stock gapped lower and quickly broke technical support at its 50-
dma.  The selling stalled just above round-number psychological
support at $70.00 and its 100-dma.  If it continues to breakdown
bears might target a move toward its 200-dma near $65.00.

Chart=


---

Intl Game Technology - IGT - close: 38.59 change: +0.59

WHAT TO WATCH: It would appear that after a vicious bout of
profit taking post-earnings in late April that IGT has found a
new bottom at the $36 mark.  Now the stock is starting to rebound
and its first test will be the 100-dma and the $40.00 level.  The
company is a dominant player in its field and many analysts feel
that the recent weakness may be a buying opportunity.

Chart=



-----------------------------------
RADAR SCREEN - more stocks to watch
-----------------------------------

NKE $66.43 -0.11 - After several weeks of weakness NKE has found
support at its 200-dma.  The stock looks oversold and way over
due for a bounce even though it tried to bounce a week ago.  If
it breaks $65.00 one could probably target $61-60.

FLIR $47.85 +0.97 - FLIR turned in a decent performance today and
appears to be heading back toward its highs near $50.00.


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

A Sneak Peek At The New June CPTI Positions
By Mike Parnos, Investing With Attitude

One more day until the results are in.  Tomorrow should be
exciting.  Actually, it’s the opening settlement prices for our
two index positions that will help determine just how much money
we made this month.  Could be great or could be just average.

Did you notice how the two European indexes (SPX and MNX) finished
Thursday almost right at a strike price?  Just imagine how many
additional transactions they generated by keeping the index price
close to the strike prices.  The market makers are sharp cookies.
Just remember that, in addition to an unpredictable market, we’re
up against the market makers, too.

Did you take a look at the quickies?  The QQQ trade was a huge
success and it looks like the other two are going to work out
nicely.  I’m looking forward to writing the Sunday column.  I just
loves addin’ up them dead presidents.

Also, we’ll catch up on the Zero-plus and QQQ Strangle strategy
positions as well.
_______________________________________________________________

NEW JUNE POSITIONS

June Position #1 – SPX Iron Condor – 1089.19
Let’s establish a nice large 125-point range and take in a few
bucks.  We’re being a little more conservative this month.
Sell 5 SPX June 1150 calls
Buy 5 SPX June 1170 calls
Credit: $1.20 (x 5 contracts = $600)

Sell 7 SPX June 1125 puts
Buy 7 SPX June 1110 puts
Credit: $1.00 (x 7 contracts = $700)

Total net credit of $1,300.  Maintenance: $10,500.  Maximum profit
range of 1025 to 1150.  Lots of room for the SPX to roam.
Potential profit is $1,300.

June Position #2 – BBH Iron Condor - $144.39
This one gave us a scare early in the May cycle, but there’s still
money to be made in another nice wide spread.
Sell 10 BBH $155 calls
Buy 10 BBH $165 calls
Credit: $.70 (x 10 contracts = $700)

Sell 10 BBH $135 puts
Buy 10 BBH $125 puts
Credit: $.90 (x 10 contracts = $900)

Sell 10 BBH $155 calls
Buy 10 BBH $154 calls
Credit: $65 (x 10 contracts = $650)

Total net credit of $1,550.  Maintenance: $10,000.  Maximum profit
range of $135 to $155.  Lots of room to roam.  Potential profit:
$1,550.

June Position #3 – RUT – Iron Condor – 540.75
I think we can make some good “hypothetical” money with a 100
point spread.
Sell 10 RUT 590 calls
Buy 10 RUT 600 calls
Credit: $.80 (x 10 contracts = $800)

Sell 10 RUT 490 puts
Buy 10 RUT 480 puts
Credit: $1.00 (x 10 contracts = $1,000)

Total net credit of $1,800.  Maintenance $10,000.  Maximum profit
range of 490 to 590.  Lots of room.  Potential profit: $1,800.

June Position #4 – MNX – Iron Condor - $139.69
Here’s another opportunity to take in respectable premium and
create a relatively large range.
Sell 10 MNX 147.50 calls
Buy 10 MNX 152.50 calls
Credit: $.70 (x 10 contracts = $700)

Sell 10 MNX $132.50 puts
Buy 10 MNX $127.50 puts
Credit: $.60 (x 10 contracts = $600)

Total net credit of $1,300.  Maintenance: $10,000.  Maximum profit
range of $132.50 to $147.50.  Profit potential: $1,300.
________________________________________________________________

Those Friendly Reminders
The premiums quoted on the above educational trades are based on
Thursday’s closing bid/ask prices.  On Friday, the premiums will
likely be slightly different due to market movement and/or the
additional day of time erosion.  You may be able to get the above
“hypothetical” quoted premiums.  Even if you come reasonably
close, they should still be good trades.

In a few instances, when the bid/ask spread is wide, we figure you
may be able to shave off a nickel here and there.  Be careful.  If
a stock gaps up or down, it may change the entire dynamic of the
trade.  Don't skydive without a parachute.  Just because you have
a pulse and evidence of brain activity doesn't mean you a trader.
And make sure you thoroughly know the intricacies of a strategy
before you trade.  The money you save may be your own.
________________________________________________________________

MAY CPTI POSITIONS

May Position #1 – SPX Iron Condor – 1089.19
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.  Looks good,
but we’re still exposed to tomorrow’s opening settlement price.

May Position #2 – RUT Iron Condor – 540.75
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.  Exciting,
isn’t it?  Tomorrow’s trading will tell the tale.

May Position #3 – MNX Iron Condor - $139.69
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.  Did you
get out Wednesday when you should have?  If not, you can bite your
fingernails as you await tomorrow’s settlement price.

May Position #4 – BBH Iron Condor - $144.39
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.  One more day.  Position looks great.
______________________________________________________________

ONGOING POSITIONS

QQQ ITM Strangle – Ongoing Long Term -- $34.85
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 – 533.20
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.

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 calls.  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 - $96.52
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.


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TRADERS CORNER
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Moving Averages As Support & Resistance
By Leigh Stevens
lstevens@OptionInvestor.com

Moving averages are not unlike trendlines - they not only help
measure the direction and momentum (the relative angle) of a
trend, but can alert us to when a trend has reversed.

However a moving average is also a lagging indicator as it is
based on based on past closes only.

A significant difference between trendline use and using moving
averages to tell us things about a trend or trend reversal is
that, whereas the break of a trendline can alert us on a pretty
immediate basis that a trend is reversing, we need to wait
usually to see if a close puts a stock or index above/below a key
moving average.

While it’s at the end of the latest period being measured that we
see if the most recent close is above or below the moving
average, we often see highs or lows bounce off from key moving
averages. This can be contrasted to when prices penetrate or
pierce a trendline, where this penetration is seen immediately –
although it may not be apparent until near the end of the
session, if the close will be above or below the trendline which
is also the “confirming” moment so to speak.

Many analysts, money managers and traders, myself included, at
least partly define the long-term trend by whether a stock or a
market average is trading above or below its 200-day (40-week)
moving average. The secondary stock market trend seems fairly
well-defined by the use of the 50-day (10-week) moving average.
To purchase a stock for an investment that has been in a down or
sideways trend, the “minimum” requirement should be a close above
its 50-day moving average – even more conclusive is a close above
the 200-day moving average.

In the Nasdaq Daily chart below, the first break of the trendline
was at the up arrow shown just under the green line.  The
"confirming" return to the broken trendline [tending to "confirm"
that the prior trend (up) had reversed] is seen at the down
arrow. The return to the previously broken up trendline was when
the Nasdaq Composite was above 2000 and was high-potential area
to adopt a bearish strategy in the Nasdaq indices; e.g., buying
NDX puts and/or shorting the Nas 100 Tracking stock QQQ.




Compare this to the break below the 200-day moving average at the
dark magenta line in the chart above which occurred just over
1900. The lagging effect of the moving average is apparent here
in that moving average showed the changing nature of the trend
significantly later than the point where the trendline was
penetrated. There was then a "confirming" rebound back up to the
moving average with the subsequent inability to break out above
it.

In the chart above, the fact that there was a later rally to the
same area as the prior top, forming the top end of the down
trendline channel (dash blue line) was a was a definite
"confirming" technical indication of a trend reversal.  I am
always looking for as many technical factors as possible that
line up bearishly or, conversely, suggest a bullish turnaround or
reversal.

DIFFERENT INDEX – MOVING AVERAGE IS "ACTING AS" SUPPORT

In the S&P 500 chart (SPX) shown below, trendline support was
broken quite a bit higher than where SPX has been trading lately.
And, here the 200-day moving average is not "confirming" the same
kind of trend reversal that has occurred in Nasdaq.  The green
arrow shows how our key average is acting as support or defining
an area where enough buying is coming in to keep the Index from
sinking under the average.




That the 200-day moving average "defines" support as we see
above, is not an accident - as this particular moving average,
the 200-day, is one that institutional money managers tend to
associate with a price area where stocks have good value.
ASSUMING of course that the longer-term outlook for earnings
still looks favorable as part of an economic growth scenario.

We can anticipate that a major technical milestone comes with a
"test" of the 200-day moving average.  When we say that a moving
average is "tested" the reference is usually to whether a stock
or index close pierces (goes through) the moving average in
question or NOT – if prices pierce the moving average, there is
then a watch on whether on subsequent hours, days or weeks,
prices ALSO stay above or below the moving average in question.
As long as this is the case, we may then trade more heavily on
the long side on pullbacks; e.g., buying stocks or index calls.

For options trading, the key moving averages will tend to be
shorter ones; e.g., 5, 10, 15, 21-day lengths on daily charts. In
a bearish downtrend, a move up to but not beyond these averages
are often put buying opportunities – especially in my estimation
in the case of the 21-day average.  There are times where there
is of course only a ONE close above/below some key moving average
as the item in question lacks follow through the next day.

In the case of a single close above/below a key moving average
and where other technical factors leave you in doubt about
whether this event is merely a fake-out move or whether it’s a
trend reversal, it can be useful to wait and see if there are TWO
consecutive closes above or below the moving average.  Typically
or most often, a true trend reversal will occur on more than one
single penetrating close - whether that close is hourly, daily or
weekly – and there will at least two consecutive closes that
pierce the moving average.

Many option traders use combinations of moving averages.  For
example – from a trading standpoint, buying puts on an initial
downside penetration of the 10-day moving average, especially if
there are other bullish chart considerations (e.g., a breakout
below a trading range or "rectangle"), but only taking one-half
of the number of contracts of a usual purchase.  A further
purchase could be made after a close below the 50-day
average.




It is also often appropriate to wait for a time and see if a
support/resistance "role reversal" comes into play.  For example
if the 50-day average age has been coinciding with a series of
highs or lows and are frequently stopping or "deflecting" the
price moves, such moving averages are acting as resistance or
support. This was happening on the last rally attempt in April as
can be seen on the chart above - there was a temporary ability
for the Dow to get back above its 50-day average but it was not
able to maintain this for long. As soon as it retreated back
below the 50-day average, only one day saw a "touch" to this
line, then down, down, down from there.  -

Just as with prior lows or highs and with trendlines,
their can be role reversal – once broken, support "becomes"
resistance and resistance becomes support just as with trendlines.

For example, the 21 or 50-day moving average has been acting as
support on a decline or in a sideways trend. Prices then decline
below the 50-day average and keep falling in the short-term.  On
the next rebound the 50-day average "deflects" the rally.  This
price action relative to the moving average should be assumed,
until otherwise resolved, to be a definite sign of a bearish
trend reversal.

As declines often LOSE ground faster than advances GAIN ground
and the price breaks sharper, there will typically be fewer
occasions of prices rebounding back up to and then being
deflected by, a key moving average - but there are some
occurrences of course.

Good Trading Success! using Moving Averages


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