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Daily Newsletter, Wednesday, 05/26/2004

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The Option Investor Newsletter                Wednesday 05-26-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Tech Stays Positive
Futures Wrap: See Note
Index Trader Wrap: A geopolitical/historical update


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     05-26-2004            High     Low     Volume Advance/Decline
DJIA    10109.89 -  7.73 10128.77 10077.81 1.70 bln   1687/1144
NASDAQ   1976.15 + 11.50  1976.16  1957.58 1.57 bln   1794/1245
S&P 100   542.60 +  0.21   543.43   540.10   Totals   3481/2389
S&P 500  1114.94 +  1.89   1116.71 1109.91
RUS 2000  567.77 +  2.38   567.77   562.47
DJ TRANS 2939.92 + 74.56  2940.32  2911.62
VIX        15.97 +  0.01    16.30    15.78
VXO        16.15 +  0.24    17.06    15.95
VXN        21.63 -  0.41    22.53    21.56
Total Volume 3,635M
Total UpVol  2,457M
Total DnVol  1,115M
52wk Highs     140
52wk Lows       90
TRIN          0.70
PUT/CALL      1.01
*******************************************************************

Tech Stays Positive
by James Brown


The Dow Industrials may have ended in the red today but bulls can
still claim a victory.  After yesterday's big 159-point gain the
INDU only lost about 8 points due to weakness in SBC and VZ.  The
NASDAQ Composite posted its fourth straight gain and the S&P 500
index marked its fifth straight gain despite disappointing
economic data and renewed terror concerns.

The morning started out on a sour note when the government raised
concerns about the growing threat of terrorist actions on
American soil.  Fortunately, the 10:30 AM low proved to be the
low of the day and stocks slowly drifted higher throughout the
session.  Later in the afternoon Attorney General John Ashcroft
held a press conference and pointed out seven specific
individuals the government was looking for and asked citizens to
help.  What could be challenge for stocks this summer are the
number of high-profile events that could be targets for terrorist
actions.  On the list are the soon to be dedicated WWII memorial,
the G8 summit in Georgia, the Democratic convention in July and
the Republican convention in August, the Olympics in Athens, and
the November elections here at home.

Speaking of home the U.S. durable goods orders for April fell a
worse than expected 2.9% to $191.3 billion.  Economists had been
looking for a mild decline of 0.9% after February's 3.9% gain and
March's upwardly revised 5.7% jump.  The drop in durable goods in
April was the biggest slip in almost two years.  While the number
was disappointing Wall Street didn't seem too worried and won't
be unless there is a repeat in May.

The second biggest economic report out today was the April new
home sales.  Economists were expecting a dip from the record
highs near 1.239 million in March to 1.19 million in April
(annualized pace). The Commerce Department surprised the markets
with an 11.8% drop to 1.09 million homes.  This was the largest
one-month drop in a decade and immediately sent the home building
stocks lower.  The decline was fueled by significant slow downs
in the South with a 22% drop in sales and the West with a 9.4%
drop in sales.  Contributing to the decline was a strong rise in
30-year fixed rate mortgages to 6% and the price of homes hitting
new all-time highs.

Oil remained in the spotlight as well but confusing supply data
produced a volatile session for crude.  The Energy Department
released their supply numbers that showed no change in crude oil
stocks and a drop in gasoline stocks.  Yet shortly thereafter the
American Petroleum Institute released their supply numbers
showing a rise in crude and gasoline inventories.  Crude oil
futures ended lower on the session down 44 cents to $40.70 per
barrel.  Investors took it as a cue to do a little profit taking
in energy stocks and the OSX oil services index lost 1.72% while
the OIX oil index fell 0.74%.

Fortunately the volatile session for oil and our own
disappointing economic data didn't appear to have much impact on
global stock exchanges.  The Japanese NIKKEI jumped 189 points to
11,152 in response to our own rally yesterday.  European stocks
were mostly higher as well with gains for the English FTSE,
German DAX and French CAC.

Looking at a chart of the Dow Industrials you can see how
yesterday's big rally broke out of the recent consolidation phase
and above its simple 200-dma.   The good news is today's minor
decline held above the 200-dma and the 10,100 level.  A chart of
the NASDAQ looks encouraging too.  Yesterday's gain broke out
above its 200-dma and today's gain closed above its 50-dma.  The
tech-rich index is also above resistance at 1950 and 1970, which
leaves the next hurdle at the 2000 mark.

Chart of the Dow Industrials:



Chart of the NASDAQ Composite:



Overall market internals were bullish with advancing issues
running past decliners almost 17 to 11 on the NYSE and 3 to 2 on
the NASDAQ.  Up volume was 50% stronger than down volume on the
NYSE and nearly three times stronger than down volume on the
NASDAQ.  Money was flowing into tech, biotechs, some financials
and gold while investors were selling oil service stocks and home
builders.

The Dow probably would have closed in the green today if it
hadn't been for a one-two punch from VZ and SBC communication.
Verizon Communications (VZ) was the biggest drag on the Dow
Industrials with its 2.96% decline and SBC was close on its heels
with a 2.28% decline.  Both stocks are dropping due to rising
competition from the likes of Comcast.  Comcast Corp (CMCSA), the
nation's largest cable company, announced today that it would
offer 40 million households the opportunity to use VoIP or voice-
over-Internet protocol to make their phone calls through their
high-speed cable modems by 2006.  This is a huge threat to
traditional phone companies.

Another Dow component making headlines was Boeing (BA).  Last
year BA suffered from a scandal over its controversial leasing
deal for 100 Boeing refueling tankers.  Today the Pentagon
announced that it would postpone any decision on the $23.5
billion deal.  Defense Secretary Donald Rumsfeld has ordered two
new studies done on the project as the Pentagon considers other
options that might be less expensive.  A decision might be
reached in November but already some analysts feel that BA may
lose the deal and be forced to take a $300 million charge.
Shares of BA closed up 6 cents to $44.76.

Some of Wednesday's biggest movers were in the lucrative heart
stent industry.  We've seen a lot of news come out this week with
Medtronic's disappointing clinical trials data on Tuesday sending
shares of Boston Scientific (BSX) and rival Guidant (GDT) higher.
There was a reversal of fortunes for GDT today who announced they
were encountering some manufacturing challenges with its Champion
drug-coated stent and it may require a design change.  Such a
move would delay its filing for FDA approval and that's good news
for rival BSX with its Taxus drug-coated stent.  GDT fell 11% to
$53.71 while BSX rose 11% to $44.82.

Looking ahead to Thursday we have a handful of economic reports
to wade through.  On the list is the help wanted index, the
preliminary chain-deflator data, and the weekly initial jobless
claims but the biggest report tomorrow is the preliminary GDP
numbers.  Economists are expecting the first quarter of 2004 to
show the economy growing at 4.5% compared to 4.2% for the fourth
quarter of 2003.  This report will set the tone for the day and
probably the rest of the week.  What could be exciting is that
any moves tomorrow and Friday could be sharper than normal due to
extremely low volume.  We've had low volume the last couple of
weeks and it's only going to get worse as we head toward the long
weekend.  Trading will dry up quickly Thursday afternoon and
Friday is likely to be a ghost town with traders already gone for
the Memorial Day weekend.


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

A geopolitical/historical update

Stocks reverted back to a more familiar tight range of trade
where despite a weaker than forecasted April new home sales
report, a decline in April durable goods orders, and the
government informing us to be on the lookout for 7 individuals
that may pose a real and present danger to U.S. interest around
the world, them major indices showed relatively little change,
with technology sectors providing a slight lift for the NASDAQ.

Market Snapshot / Internals - 05/26/04 Close



Advance/decline, which stumbled in the early going, where weaker
than expected economic readings give investors reason to pause,
finished the session positive, where NH/NL indications at both
the NYSE and NASDAQ were almost identical.  While the number of
new 52-week highs are well off those levels found in January, the
number of new lows are starting to diminish as the more
intermediate-term 10-day NH/NL average ratios continue to
improve.

NASDAQ Composite 52-week NH/NL 10-day Avg. - 2% box size



Yesterday (Tuesday) my NASDAQ Composite 52-week NH/NL 10-day
ratio reversed up to "bull alert" status and today's trade saw
this ratio gain an additional 5.3%.  It's time to be making some
longer-term observations from these "oversold" levels where
bullish leadership looks to be returning.  Today's number of new
52-week lows (28) is the fewest since April 26.

The NYSE Composite 52-week High/Low (10-day Avg.) chart would
look similar to the chart above, but still be in a column of O at
12%, where we're monitoring for a 3-box reversal up to "bull
alert" status at 18%.

NASDAQ Composite (COMPX) Chart - Weekly Intervals



Aside from the 10-week (50-day) and 40-week (200-day) SMA's,
there are some rather obvious technical resistance levels present
today as there was back in March and April of 2003 leading up to
coalition forces invading Iraq.  Now the world watches as the
turnover deadline of June 30 approaches.

Yesterday's option-related, or what I feel was an unwinding of a
hedge still intrigues me.  Looking at a longer-term chart of the
NASDAQ Composite (COMPX) almost looks like the COMPX is going to
pad in some gains ahead of the June 30 deadline, perhaps give a
cushion to any type of road bumps that most investors might
expect, then should all work out as many hope, could then be set
up for a rally into the election.

Market historians would be interested in studying the period of
October 1990, when 200,000 U.S. troops amassed in the Persian
Gulf for Desert Shield, then on January 17, 1991 launched
Operation Desert Storm, and on February 28, 1991, Iraq accepted
UN resolutions liberating Kuwait.  Unfortunately for then
President George Bush, Saddam Hussein remained in power, and Bush
lost his run for a second-term in 1992.

Later this year, George W. Bush hopes to hold the presidency for
a second term.

NASDAQ Composite (COMPX) - WEEKLY Intervals (1990-1993)



Back in March of 2003 I showed a similar historical observation
of events in the Middle East, but used the SPX as an index, where
market history suggested that even during times of uncertainty
and war, equity markets tended to perform well.  Certainly,
Operation Desert Storm can't be compared to recent history and
times are perhaps "different."  In DASHED PINK, I've highlighted
a period I think may now be VERY SIMILAR, not only technically
(note 10-week, 40-week SMA and MACD) as this year's election
becomes the next geopolitical event that market participants
might be preparing for.

Well, with the government warning us to be on the lookout for 6
men and 1 woman that might be a threat to U.S. interests here and
abroad, lets keep in mind that the markets will be closed on
Monday in observance of Memorial Day.  It won't be until July 5,
the Monday following the Independence Day holiday that traders
will find another 3-day weekend.

Pivot Analysis Matrix -



Good gravy!  The S&P Banks Index (BIX.X) 347.50 +1.05% traded
both its WEEKLY R2 and MONTHLY R1 today.  That's worth noting and
taking a look at the BIX.X.

S&P Banks Index (BIX.X) Chart - Daily Intervals



While a trade at a MONTHLY R1 and WEEKLY R2 doesn't mean the
banks are set to surge further, it might actually have the BIX.X
ready to rest after what I would consider to be a "Fed you're on
track" type of move.  I went back through my weekly Pivot Matrix
archives and the last time the BIX.X traded its WEEKLY R2 was for
the week of 03/29-04/02 where the BIX.X would have come just shy
of our current MONTHLY 19.1% retracement of 350.44.

With the banks obviously being one of the bigger bullish catalyst
groups for the SPX/OEX the past couple of weeks, a pivot matrix
trader might envision a little further pop tomorrow near the 350
level, but sign of softening back below MONTHLY R1 of 346.03.

S&P 500 Index Chart - Daily Intervals



For the most part, percentage gains have been broadly positive
the past 5-sessions, but the SPX lags a 3.75% gain from the
BIX.X, or it doesn't show up was much as Telecom (+0.26% in 5
days), Drugs (+0.26% in 5 days) and Healthcare sectors (+1.75%)
have been a lag.  My thinking is that the banks might be due for
a rest, and for SPX/OEX strength above the MONTHLY Pivots, either
technology or these lagging telecom/drug/healthcare had better
get a move on.  If the banks rest and the telecom/healthcare/
drugs lead to the downside, it could be tough sledding for the
SPX/OEX.

Two rather consecutive buy program premium alerts were found this
morning just above the 1,109 level and session lows.  Almost as
if computers were saying.... "no, no, no... you're not going
anywhere right now.  Keep it here."

Dow Industrials (INDU) Chart - Daily Intervals



The INDU looks to me like it wants to bid to 10,250, but each day
it seems to be one or two components that just can't get their
act together, where losses dampen gains found elsewhere.

Dow Components - Sorted by price



Drugs and telecom are represented in the INDU, as is some banking
flavor at the larger money center banks like JPM and C.
Yesterday, Dorsey/Wright and Associates' Metals Non Ferrous
(BPMETA) reversed up to "bear correction" status (current reading
59.26% after falling to 50%), which indicates some demand
beginning to outstrip supply.  Alcoa (NYSE:AA) $31.00 -1.17%
traded a triple-bottom sell signal at $32, has fallen to $29, and
while I don't think AA will trade its current bearish vertical
count of $21, it may take a trade near $27, which should be a
major level of support before it really begins providing some
meaningful strength to the INDU again.

The only other sector bullish % to reverse up has been the
Protection Safety Equipment (BPPROT) to "bear correction" status
on 05/24/04, where it reversed up from a low reading of 42%, to
currently read 51.72%.  Recent news of terrorist plots here in
the U.S. has given the sector renewed interest.

Jeff Bailey


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The Option Investor Newsletter                Wednesday 05-26-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: AMZN, GM
Watch List: New Highs and Potential Buys


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

None


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

None


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

Amazon.com - AMZN - close: 44.69 chg: +1.07 stop: 44.05

As expected we've been stopped out of AMZN.  The stock rose
another 2.45% to breakout above resistance at $44.00 and its 50-
dma.  The three-day rally has produced a new buy signal in its
MACD but we'd be hesitant to chase it with bullish plays.  The
Internet sector was a laggard to many of its fellow tech-related
indices.  Therefore we suspect that today's move in AMZN may have
been related to news that the company has announced a new multi-
year agreement with the Bombay Company (BBA).  BBA will use
AMZN's technology to sell their products online.

Picked on May 02 at $ 43.60
Change since picked: + 1.09
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   8.4 million
Chart =


---

General Motors - GM - close: 45.14 change: +0.40 stop: 45.25

We were afraid this would happen to our GM play after yesterday's
bullish romp.  The stock had been pressed right to the edge of
resistance at the $45 level and the 20-dma.  The bulls were still
feeling frisky this morning and propelled the stock through both
those measures of resistance, as well as our $45.25 stop before
running out of steam and relaxing a bit into the close.  That
didn't matter though, as our stop had already been hit and GM is
still looking a bit stronger than we'd like with today's close at
the 20-dma.  As we suggested yesterday, honoring those stops was
the right course of action and we're officially dropping the play
tonight.

Picked on May 9th at          $44.60
Change since picked:           +0.54
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =      5.17 mln



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Brokerage Group, addressing the demand for personalized,
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and Alan Knuckman specialize in live assistance of stock*,
option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

Live Broker and Online Trading Available     888-281-9569

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

New Highs and Potential Buys

___________________________________________________________________

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.
___________________________________________________________________


Zimmer Holdings - ZMH - close: 85.10 change: +1.35

WHAT TO WATCH: This medical device maker is no stranger to our
watch list.  Shares of ZMH have weathered the market's downturn
from its April highs very well.  Now it appears that the sideways
consolidation between $79 and $85 may be over.  Yesterday's
market rally inspired a big bounce from the $80 level but now
we're seeing some follow through on a breakout above $85.  Its
MACD has also produced a new buy signal and ZMH has seen strong
volume on the rally.  This looks like an entry point for bullish
positions.  The $90 mark would make a good initial target.

Chart=


---

Briggs Stratton - BGG - close: 75.77 change: +0.79

WHAT TO WATCH: We mentioned BGG in the MarketMonitor today.  The
stock is really showing some strength with a five-day rally.
Plus, it's up six out of the last seven sessions.  Also
noteworthy is the stronger than average volume on the surge
higher.  Its P&F chart shows a strong and steady climb higher
with a $91 price target.  We'd watch it for a dip as a potential
entry point.

Chart=


---

Fortune Brands - FO - close: 74.38 change: +0.10

WHAT TO WATCH: Fortune Brands is quite the conglomerate.  The
company makes liquor and wine to golf equipment to home, hardware
and office products and that's an incomplete list.  Investors
might want to give the stock another look.  Its P&F chart is
bearish but it has reversed back into a column of X's.  Meanwhile
its daily chart shows the stock with new support above $70.  We'd
consider new bullish plays if FO can breakout above its 40-dma,
50-dma and the $75 mark.  Target the $80 region.

Chart=


---

Valero Energy - VLO - close: 66.02 change: +0.56

WHAT TO WATCH: Oil has weakened from its all-time high on Monday
but demand remains strong and so is demand for the refiners.  VLO
has been out performing some of its peers in the oil-refining
sector.  The sideways consolidation between $62 and $66 is
essentially above its March through early April resistance.
Traders can look to buy a bounce back from $63.00 again or look
for a breakout over $66.50-67.00.

Chart=



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

COF $69.02 -0.23 - We're still watching COF for a breakout over
$70.00.

MXIM $49.98 -0.06 - MXIM is right at the $50.00 resistance level
but it also happens to be the P&F resistance level.

STR $37.00 +0.46 - This natural gas stock has rallied right back
to major resistance at $37.00 and volume has surged on today's
gain.  Could be a break out in the making.


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would welcome you as a permanent subscriber.

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price is $129.95 which is $20 off the monthly rate.

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

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or you may call us at 303-797-0200 and give us the
information over the phone.

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