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Daily Newsletter, Tuesday, 06/01/2004

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The Option Investor Newsletter                 Tuesday 06-01-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Resistance Test, Again
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Market Unshaken


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      06-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10202.65 + 14.20 10214.57 10134.86 1.45 bln 1614/1529
NASDAQ   1990.77 +  4.00  1991.29  1972.71 1.44 bln 1658/1412
S&P 100   545.11 -  0.02   545.93   541.17   Totals 3272/2941
S&P 500  1121.24 +  0.56  1122.32  1113.32
W5000   10940.08 + 13.70 10949.15 10863.84
SOX       486.05 -  2.80   490.07   481.48
RUS 2000  572.49 +  4.21   572.76   566.64
DJ TRANS 2963.50 + 15.50  2965.10  2940.75
VIX        16.30 +  0.80    16.96    16.19
VXO (VIX-O)16.67 +  0.85    17.60    16.47
VXN        22.57 +  1.24    23.58    22.51
Total Volume 3,164M
Total UpVol  1,503M
Total DnVol  1,621M
Total Adv  3662
Total Dcl  3363
52wk Highs  180
52wk Lows    57
TRIN       1.15
NAZTRIN    1.15
PUT/CALL   0.93
************************************************************

Resistance Test, Again
by Jim Brown

For the third consecutive day the indexes rebounded back to
strong resistance and failed to breakout. However, after the
afternoon dip to initial support we should be grateful for
any rebound back to resistance. For all practical purposes
this was just another holiday with volume only 3.1B shares
across all markets. This was only about 200 million shares
over the 2.9B shares traded on Friday when everyone left
early.

Dow Chart - Daily


Nasdaq Chart - Daily




The big news for the morning was the ISM report which at
62.8 beat consensus estimates of a decline to 62.0 from
last months 62.4. This was a strong report that stretched
the string to seven consecutive months over 60. Anything
over 50 is considered to be an expanding economy. It has
been vacillating in the 62+ range since October's 57.1
reading. The ISM shows that the economy is maintaining its
rebound although not surging ahead. Strong steady growth
and not necessarily inflationary. Production components did
drop slightly with New Orders falling to 62.8 from 65 and
Backlog to 63.0 from 66.5. The biggest surprise was the
employment component which jumped from 57.8 to 61.9 and
suggests the Jobs number on Friday could be as much as
+100,000 over prior estimates. 36% of firms said hiring
was up while only 7% said jobs were still shrinking. The
employment component is nearing a three-year high and a
good indication of how strong the gains were.

The employment jump sent analysts back to their calculators
to reconsider the 223,000 consensus estimate for Friday's
Jobs report. Only 3 of 66 economists polled had expected
Friday's Jobs to be +300K or more. Today's ISM suggests
that consensus could be 100K short and increases the risk
the Fed could react early to a blowout number. The markets
retreated on this risk until late in the afternoon but a
late day buy program pushed the indexes back to resistance.
With the positive ISM and the expected positive Jobs report
a Fed rate hike on June 30th is almost a lock. The Fed funds
futures jumped from last weeks 92% chance of a hike to 98%
after today's data. Futures are still predicting a 100-point
increase in rates before year end.

The Challenger Layoff report showed that layoffs remained
low at 73,368 for May. This was only slightly above the
72,180 for April and confirms the ISM component above.
Challenger also said they saw additional hiring of 55,000
for the month. They did not previously track hiring trends.
This was the fourth month layoffs remained in the low 70K
range and should be lower except for higher commodity
prices. With prices soaring, doubling in some cases,
manufacturers are still looking for ways to cut costs and
are using increased productivity to trim the work force.
With employee benefits rising almost as fast commodity
prices any chance to reduce the head count is quickly
seized. In many cases employers are terminating workers
only to hire them back as contractors to avoid paying the
benefits. This counts as a technical layoff but does not
impact the workforce. Small companies are leading the
hiring and large companies are continuing to cut workers.
The retail sector had the highest cuts at 10,868 layoffs
with the financial services sector next at 6,113.

Construction Spending soared over three times consensus
estimates with a +1.3% gain in April. March was also
revised up sharply from +1.5% to +2.4%. Much of the gains
were in single family homes but the biggest jump was +5.4%
in Health Care buildings. Over the last three months that
component has averaged +4.63%. The coming baby boomer
retirement cycle has hospital and medical center building
on steroids. As mortgage rates climb the single family
component, +1.2% this month, will begin to decline. The
manufacturing sector dropped -6.1% in April following a
-3.6% drop in March. No need for buildings if your work
is outsourced overseas.

There are no material economic reports for Wednesday.

The World Semiconductor Trade Statistics boosted its 2004
forecast to 28.4% growth from 19.4% it predicted last Oct.
According to WSTS the first quarter has demonstrated
stability and consistency across all regions and major
product lines. Unfortunately the future is not bright
forever. They see only +8.5% growth for 2005 and no growth
for 2006. They do expect a recovery cycle in 2007 with +10%
growth. Obviously these estimates are subject to change
but they do confirm to estimates by others for 2005/2006.

The SOX lost ground on the news after trading at 490
resistance early in the day. Investors will be able to
get an inside look a one portion of the sector on Thursday
when Intel provides its mid quarter update. Some analysts
think PC sales may not be tracking the normal seasonal
down trend and could show some strength. Others think
the trend is weaker than expected based on comments from
Dell and HPQ and expect Intel to lower estimates. Both
camps think the estimates will remain in the prior range
Intel offered but to the low side.

KB Homes said today that quarterly sales rose +27.7% for
their quarter ending May-31st. They said very strong growth
of +58% in the Central and Southeastern U.S. offset a -18%
decline on the West Coast. Orders in France rose +30%.
With mortgage rates rising this trend should moderate
but moderate to what? This very strong growth has yet
to show signs of failing despite the slow down on the
West Coast.

Heading the news today was the terrorist attacks in Saudi
Arabia. 22 were killed and was the second recent attack
on oil assets there. Oil futures hit a new high of $42.40,
up +3.30 from last Thursday's $39 dip low. The futures
went out near the high of the day despite a pending OPEC
meeting. OPEC will meet again on Thursday to discuss
quotas. Rumor has it that they will increase production
quotas by as much as +10%. Unfortunately there is not
likely to be an increase in actual output. OPEC producers
are already exceeding quotas to capitalize on the high
prices. The move by OPEC to "legitimize" this production
by raising the quotas is meant to regain some level of
"control" in the market. If all your members are producing
more than your established quota and you can't make them
stop then make a big show of raising quotas to "stabilize"
prices and try to get some benefit from the current
situation. Even with OPEC saying they will raise
production as much as possible to stabilize prices, in
reality only Saudi Arabia has the ability to produce more
than they are currently delivering. Most believe this
would be two million barrels per day maximum and likely
much less depending on how much they are already cheating.
Bottom line - don't expect oil prices to be substantially
lower any time soon.

The higher oil prices helped to depress the markets in the
morning as prices rose over $42. The Dow rose to 10214 and
just under the 10220 resistance that stopped the advance
last week. Sellers appeared immediately and the slide began.
I say slide rather than drop because it was a slow, leisurely
decline on very low volume. Every round number touched became
alternating support then resistance until 10140 was reached.
Buyers did not rush in but they did provide a bottom that
lasted nearly an hour before a strong buy program hit. That
program added +1100 issues to the A/D line and pushed the
Dow from 10150 to 10210 once again while dazed day traders
watched in surprise. Strong program trades seldom start
after 3:PM much less 3:30 but that buy program probably
rescued the Dow from testing 10100 once again. The internals
were negative and oil/rate news was filling the airwaves.

The Nasdaq had started out battling 1990 resistance after
the ISM and then fell sharply to support at 1975 by 11:30.
After a midday bounce it retested that support at 2:30 and
then after a successful retest took part in the afternoon
bounce. The Nasdaq ended right back at 1990 resistance at
the close. It was a complete round trip day on both the
major indexes.

The challenge is still the current resistance levels that
have held for three days on low volume. Those levels are
10220, 1990 and SPX 1122. With the Jobs report due Friday
and now expected to be even stronger the Fed is almost
sure to hike rates on June-30th. Everyone says a Fed rate
hike will produce a rally because it confirms the recovery
and the beginning of a Fed rate hike process. The uncertainty
factor will be removed. While I think this is all a bunch
of bull from those who want to be bullish it could produce
the desired impact.

The key point for us is the clear trigger level. Those are
the resistance levels I defined above. Should we move over
those levels on strong volume then we could easily move
higher to the next resistance at 10325, 1135, 2025 before
the Jobs report. Each level higher will become more
difficult until that Jobs report is released. It still
represents uncertainty. Far too many times we have seen
Jobs numbers surprise and not always in the way we expect.

I would not be surprised to see us stagnate here as the
days count down to June-30th. Tech traders will also be
afraid of the Intel news on Thursday. Intel traded down
today after two weeks of gains. Traders are taking profits
rather than hope for the best. Intel traded 51 million
shares today when the overall markets barely managed to
beat Friday's very low volume. There are many positives
and negatives in the market this week and very few of
them are stock related. With the indexes locked at current
resistance we could easily go either way and I view the
odds as 60:40 in favor of a decline. It is that close. If
you look at the charts above you will see we are still in
a confirmed down trend until higher overhead resistance
is broken. The end of day buy program changed the entire
technical outlook for me. Had the indexes finished at the
lows I would have bet on a range bound market the rest of
the week. While I know the buy program was the result of
only one buying decision it may have given the bulls just
enough confidence to take us higher. Without any material
economic reports on Wednesday we will be left to move on
world events and Jobs speculation. I am definitely neutral
today but ready to react to a move over the 10220, 1990,
1122 resistance or another failure at those levels.

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_060104_1.asp


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

Market Unshaken
-J. Brown

The first trading day of June was amazing but not for its gains.
The major averages traded mostly sideways save for a last hour
rally.  No, Tuesday was amazing because we closed positive.  News
that there was a terrorist rampage in Saudi Arabia that left 22
people dead sent the price of oil to a new all-time high above
$42 a barrel.  It was only a week ago that oil hit its previous
high and sent investors scurrying for cover.  The fact that
investors shrugged off both another terrorist attack, granted it
was overseas, and a new high in oil is impressive and bodes well
for the rest of the month assuming the jobs number doesn't
surprise us.

Economics were also part of today's recipe.  The better than
expected ISM manufacturing number erased any fears that the
economy might be slowing down.  Plus the U.S. construction
figures hit its third all-time high in a row.  Economists were
looking for 0.4% growth but we got 1.3% growth.

Buyers were rotating into biotechs, natural gas, oil and
healthcare.  Yet today's biggest gains were in the Internet
stocks with a 1.68% jump in the INX Internet index.  Airlines
were big losers, understandably so with the rise in oil.  Broker-
dealers and gold stocks followed them lower.  Overall market
internals were mixed to bullish.  Advancing stocks outnumbered
decliners by a small margin on the NYSE and 17 to 14 on the
NASDAQ.  Up volume outweighed down volume on the NASDAQ but down
volume edged past up volume on the NYSE.  Overall volume remained
light.

Wall Street will continue to focus on economics this week.
Tomorrow brings the auto and truck sales while Thursday will
unveil a number of reports with the ISM services leading the
list.  We'll also hear from Intel at their mid-quarter update on
Thursday night.  Of course Friday is the big day with the non-
farm payrolls (a.k.a. jobs report) for May.  Looming large next
week is the G8 summit in Georgia, which many feel is a big target
for terrorist and could have investors on the defensive.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8851
Current     : 10202

Moving Averages:
(Simple)

 10-dma: 10059
 50-dma: 10246
200-dma: 10068



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1121

Moving Averages:
(Simple)

 10-dma: 1104
 50-dma: 1116
200-dma: 1086



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1180
Current     : 1468

Moving Averages:
(Simple)

 10-dma: 1431
 50-dma: 1439
200-dma: 1427



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

CBOE Market Volatility Index (VIX) = 16.30 +0.80
CBOE Mkt Volatility old VIX  (VXO) = 16.64 +0.82
Nasdaq Volatility Index (VXN)      = 22.57 +1.24


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.94        500,343       467,935
Equity Only    0.73        422,150       306,293
OEX            1.72         14,392        24,797
QQQ            3.39         26,875        91,066


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

Bullish Percent Data

           Current   Change   Status
NYSE          64.1    + 0     Bear Confirmed
NASDAQ-100    38.0    + 0     BULL ALERT
Dow Indust.   66.7    + 0     Bear Confirmed
S&P 500       60.6    + 0     Bear Confirmed
S&P 100       60.0    - 1     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: 0.78
10-dma: 0.83
21-dma: 0.95
55-dma: 1.08


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    1439      1672
Decliners    1373      1373

New Highs      63        68
New Lows       29        15

Up Volume    717M      727M
Down Vol.    774M      686M

Total Vol.  1505M     1431M
M = millions


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

Commitments Of Traders Report: 05/25/04

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

Not much movement from the commercial traders.  It looks like
they shifted a handful of money from shorts to longs.  Conversely
the small traders have rotated some money from longs to shorts.


Commercials   Long      Short      Net     % Of OI
05/04/04      397,964   417,175   (19,211)   (2.4%)
05/11/04      401,365   421,672   (20,307)   (2.5%)
05/18/04      394,352   423,258   (28,906)   (3.5%)
05/25/04      400,713   420,764   (20,051)   (2.4%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
05/04/04      137,112    80,201    56,911    21.6%
05/11/04      135,534    76,987    58,547    27.5%
05/18/04      139,647    74,597    65,050    30.4%
05/25/04      136,086    79,060    57,026    26.5%

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

There was a big drop in longs by the commercial traders but
it was coupled with a significant drop in shorts too.  They
remain net bullish on the S&P 500.  Small traders have grown
net bearish after last week's bullish reading.


Commercials   Long      Short      Net     % Of OI
05/04/04      316,840   370,781    (53,941)  ( 7.8%)
05/11/04      378,696   362,887     15,809     2.1%
05/18/04      390,484   357,157     33,327     4.5%
05/25/04      353,722   336,406     17,316     2.5%

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
05/04/04      119,308     74,407    44,901    23.2%
05/11/04      101,199     94,408     6,791     3.5%
05/18/04       62,216     87,269    25,053    16.8%
05/25/04       91,515    100,759   ( 9,244)  ( 4.8%)

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


NASDAQ-100

Commercial traders have upped their long positions and remain
net bullish on the NDX.  Small traders have likewise upped their
short positions and remain net bearish.


Commercials   Long      Short      Net     % of OI
04/27/04       54,196     33,948    20,248   23.0%
05/04/04       56,931     35,209    21,722   23.6%
05/18/04       58,376     37,528    20,848   21.8%
05/25/04       59,891     37,630    22,261   22.8%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  22,261   - 05/25/04

Small Traders  Long     Short      Net     % of OI
05/04/04       10,247    24,764   (14,517)  (41.5%)
05/11/04        9,716    21,072   (11,356)  (36.9%)
05/18/04        9,843    18,935   ( 9,092)  (31.6%)
05/25/04       10,184    20,653   (10,469)  (33.9%)

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

Commercial traders are adding to their short positions while
small traders are adding to their longs, which is generally
par for the course.  Guess who is right more often?  Yup,
the commercial traders.


Commercials   Long      Short      Net     % of OI
05/04/04       24,296    22,181    2,115       4.6%
05/11/04       22,614    21,507    1,107       2.5%
05/18/04       22,257    22,444   (  187)     (0.4%)
05/25/04       23,578    24,632   (1,045)     (2.2%)

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
05/04/04        6,262     8,155   (1,893)   ( 9.2%)
05/11/04        7,009     7,640   (  631)   ( 4.3%)
05/18/04        9,098     6,591    2,507     16.0%
05/25/04        9,623     6,614    3,009     18.5%

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                  Tuesday 06-01-2004
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: AET, BCR, IMCL, QCOM, ZMH, AIG, BA, ERTS, JNJ,
    LXK, SLAB
New Calls Plays: DGX
Put Play Updates: CAKE
New Put Plays: None


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

Aetna Inc - AET - close: 81.04 change: -0.16 stop: 77.00

The markets essentially churned sideways the first day of June
and it's clearly evident in shares of AET.  The stock started out
strong but by lunchtime it had moved into its afternoon trading
range between $80.50 and $81.00.  The last hour rally in the
major averages sent AET from its low of the session (80.43) back
toward $81.00.  Keep an eye on the IUX insurance index.  It looks
poised for a breakout over its 40 & 50-dma's and the 322.50
level.  Should this occur then we'll look for AET to head toward
its own 40 & 50-dma's.  No change in our stop loss at $77.00.

Picked on May 30 at $ 81.20
Change since picked: - 0.16
Earnings Date      04/29/04 (confirmed)
Average Daily Volume:   1.5 million
Chart =


---

Bard C R - BCR - close: 57.17 chg: +0.10 stop: 54.25

The good news here is that there appears to be no post-split
depression.  BCR shot higher immediately on the open but then
faded back toward the $56 level.  Fortunately, by the afternoon
the previous week's buying pressure resumed and BCR was hitting
new highs.  Oddly there was a big spike higher on big volume in
the afternoon and BCR shot to $58.25 before fading into the
close.  We couldn't find any catalyst for the surge higher.
Traders looking for new positions might consider dips to $56.00.
We're going to target the $60.00 level as our exit point.

Picked on May 20 at $ 55.00 (post split)
Change since picked: + 2.17
Earnings Date      04/20/04 (confirmed)
Average Daily Volume:   386 thousand
Chart =


---

Imclone Systems - IMCL - close: 76.34 chg: +2.00 stop: 72.00*new*

The climb higher continues for shares of IMCL.  After some early
morning congestion under the $75 level shares of IMCL took off
and steadily traded higher through the last few hours of the
session.  We're encouraged by the close over $76.00 and the stock
has finally confirmed the MACD breakout we've seen forming for
days.  There is minor resistance at $77.50 but the next stop
should be the $80.00 region and short-term traders can plan to
take profits.  The company issued a press release today stating
they will present at the Friedman Billings Ramsey annual growth
investor conference in New York tomorrow between 11:00 and 11:50
AM ET.  We are raising our stop loss to $72.00.

Picked on May 26 at $ 74.05
Change since picked: + 2.29
Earnings Date      04/27/04 (confirmed)
Average Daily Volume:   2.9 million
Chart =


---

QUALCOMM - QCOM - close: 68.05 chg: +0.98 stop: 64.00

Finally, QCOM is making some progress!  After three days of being
stuck in a very tight trading range we're seeing QCOM edge higher
and close over the $68.00 level.  This brings us closer to our
short-term target of $70.00 (and secondary target of $74).
Short-term traders may want to consider taking profits as QCOM
nears the April highs near $69.50.  News was sparse and we're
going to leave our stop loss at $64.00 today.  More conservative
traders might consider upping theirs closer toward the $65 mark.

Picked on May 24 at $ 66.01
Change since picked: + 2.04
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   9.6 million
Chart =


---

Zimmer Holdings - ZMH - close: 85.60 chg: +0.25 stop: 80.00

We're still enthusiastic about ZMH's prospects but for some
reason it can't seem to hear the starting gun.  Shares have been
trading in  $1.50 range for the last 3 1/2 sessions.  The
breakout over the $85.00 level is great but momentum traders
might do better to wait for a move over $86.00.  If you prefer to
buy the dip look for a bounce from $84.00.  No change in our stop
at $80.00 but we're eyeing the 40-dma near $81.57 as an
alternative for a more conservative stop.

Picked on May 27 at $ 85.20
Change since picked: + 0.40
Earnings Date      04/26/04 (confirmed)
Average Daily Volume:   1.2 million
Chart =


---

American Int'l Grp. - AIG - cls: 73.00 chng: -0.30 stp: 69.25

Succumbing to the broad market weakness right from the opening
bell, AIG offered up a solid entry point this morning, as the
stock swooned down to just below the $72 level of support.  The
rebound from that level made perfect sense, as it was a test of
broken resistance as new support, coming right at the confluence
of the 10-dma ($71.82), 100-dma ($72.10) and 50-dma ($72.30).
AIG rebounded smartly into the closing bell, ending with just a
minor loss on the day.  Recall that we were looking for a dip
into the $71-72 area to set up the next entry point and today's
dip was made to order.  Aggressive traders can still open
positions on a breakout over last week's highs, keeping in mind
the resistance at both $74 and then again near $75.50.  But our
preferred entry strategy remains that of buying the dips.
Maintain stops at $69.25.

Picked on May 25th at        $72.00
Change since picked:          +1.00
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     5.38 mln
Chart =


---

The Boeing Company - BA - close: 45.88 change: +0.08 stop: 43.25

Investors are still trying to decide if they want to pile onto
BA's breakout from last week.  Rather than resolve the indecision
from Friday that had the stock tracing an inside day, price
stayed within Friday's range today, posting a second consecutive
inside day.  Normally these patterns are formed on rather light
volume, so the heavy volume of the past couple days is a bit of
an anomaly.  While aggressive traders can consider new entries on
a bullish break from this pattern over $46.70, such a strategy
does carry greater risk.  Our preference is to look for pullback
entries in the $44-45 area, which is now firmly supported by the
10-dma ($40.81).  In  either case, we're looking for that initial
move to the $50 level to provide an opportunity for harvesting
partial gains.  Maintain stops at $43.25.

Picked on May 27th at        $46.20
Change since picked:          -0.32
Earnings Date               4/28/04 (confirmed)
Average Daily Volume =     2.95 mln
Chart =


---

Electronic Arts - ERTS - close: 51.14 change: +0.31 stop: 47.40

It is possible to look at the price action in ERTS over the past
few days and make a pretty convincing bullish case.  The stock
has cleanly broken out over the 2-month descending trendline (now
just over $50), but the bulls are really struggling with the 50-
dma ($51.29), which has capped the intraday rallies on each of
the past 3 sessions.  As we've been pointing out, ERTS is still
pressured by its bearish PnF chart and needs to see a print at
$53 to turn things more decisively in favor of the upside.  With
the 10-dma ($50.25) and 20-dma ($50.28) converged with the broken
trendline, dips near the $50 level look like solid entry
opportunities.  Aggressive traders can enter on a breakout over
the $52 level, but our preference for momentum entries would be
to wait until we see a break through $53, generating that bullish
PnF chart signal.

Picked on May 18th at        $49.60
Change since picked:          +1.54
Earnings Date               4/29/04 (confirmed)
Average Daily Volume =     3.93 mln
Chart =


---

Johnson & Johnson - JNJ - cls: 55.77 chng: +0.06 stop: 54.00

Living up to our expectations, JNJ is not making any rapid
progress, but is steadily inching its way towards a breakout
attempt above the $56 level.  There's some intraday resistance
just under the $56.50 level as well, and we'll really need to see
a move above that level before we can expect the rally to
continue towards next resistance at $58.  As we've been saying,
on a slow moving stock like JNJ, pullback entries are really the
way to go.  We got plenty of opportunities to buy the dips near
$54 and now the point we're looking for in terms of buyable dips
is the $55 area, supported by both the 10-dma ($55.28) and the
20-dma ($54.99).  Maintain stops at $54, just under the intraday
lows of the past few weeks.

Picked on May 9th at         $55.30
Change since picked:          +0.47
Earnings Date               4/13/04 (confirmed)
Average Daily Volume =     7.35 mln
Chart =


---

Lexmark Intl. - LXK - close: 92.96 change: -1.36 stop: 91.70

After more than 2 weeks of LXK flirting with its 50-dma ($52.52)
support, we're starting to lose patience with this play.  We have
been looking for a successful rebound from the 50-dma to follow
the script we've seen in recent months, with a breakout to new
highs.  The stock has touched the 50-dma on 7 of the past 15
sessions, providing ample opportunity for entry.  But it has been
disappointing that none of the rebounds from that average have
been able to develop any upward momentum.  The rollover from the
$95 level last week pushed the daily oscillators into new sell
signals, and that increased the risk level in the play, prompting
us to tighten our stop to $91.70, just under last Tuesday's low.
LXK tested the 50-dma again today, but aside from the late-day
rebound from support, there was little for the bulls to cheer
about.  LXK really needs to hold support at the $92 level and
then break back over $95 to give us confidence that the play is
finally going to work.

Picked on May 13th at        $94.03
Change since picked:          -1.07
Earnings Date               4/19/04 (confirmed)
Average Daily Volume =     1.15 mln
Chart =


---

Silicon Labs. - SLAB - close: 51.89 change: -0.30 stop: 48.50

Traders that opted to chase shares of SLAB higher this morning
were in for a rude awakening, as the stock exceeded Friday's high
by a mere 9 cents before heading back towards support.
Fortunately we knew not to chase the stock higher, as it was
right up at its PnF bearish resistance line at $53.  We initiated
coverage over the weekend, looking for pullback entries in the
$50 area, with that support level reinforced by the confluence of
the 10-dma ($50.03), 30-dma ($49.98) and 200-dma ($49.95).
Tuesday's dip didn't quite make it down that far, as the stock
traded a fairly narrow range.  But dips to $50 still look
favorable for entry later in the week.  Once SLAB breaks out over
$53, look for next possible resistance near $56 and then look to
exit in the $58 area.  Remember, we need to see continued bullish
action from the SOX to help support this bullish play.

Picked on May 30th at        $52.19
Change since picked:          -0.30
Earnings Date               4/26/04 (confirmed)
Average Daily Volume =     1.16 mln
Chart =



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

Quest Diagnostic - DGX - close: 87.70 change: +1.55 stop: 83.45

Company Description:
Quest Diagnostics Incorporated is the nation's leading provider
of diagnostic testing, information and services, providing
insights that enable healthcare professionals to make decisions
that improve health. The company offers the broadest access to
diagnostic testing services through its national network of
laboratories and patient service centers, and provides
interpretive consultation through its extensive medical and
scientific staff. Quest Diagnostics is the leading provider of
esoteric testing, including gene-based medical testing, and
provides advanced information technology solutions to improve
patient care. (source: company press release)

Why We Like It:
This is essentially a technical breakout play on a stock with
great relative strength.  DGX, the nation's largest medical
testing company (by revenues), is up nearly 20% this year.  Most
of that gain came in the first five weeks of the year and shares
have been consolidating their October to February rally ever
since.  However, now we think the consolidation is over and DGX
is ready for its close up.. err sorry.. we mean next leg higher.
Bears will point out that DGX is short-term overbought from its
lows last week near $82.  We can't deny it but today's breakout
over major resistance at $86.50 should have shorts on the run.
Volume was 50% above average on today's move and that suggests
conviction by the bulls (and or short covering).

The next obvious resistance is the round-number psychological
$90.00 level.  Yet after four months of trading relatively
sideways we think DGX can reach toward the century mark given
enough time.  Traders can choose to buy today's breakout or look
for a pull back toward the $86.00-86.50 levels.  We're going to
start the play with a stop loss under its simple 50-dma at
$83.45.  Short-term traders can target a move to $92.50.

Suggested Options:
We're suggesting the July 85s and 90s but if you're eyeing the
$100 mark the August calls might work well.

BUY CALL JUL 85 DGX-GQ OI= 103 Last traded @ $4.60
BUY CALL JUL 90 DGX-GR OI=  70 Last traded @ $1.90
BUY CALL AUG 90 DGX-HR OI= 741 Last traded @ $3.00

Annotated chart:



Picked on June 01 at $ 87.70
Change since picked:  + 0.00
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    603 thousand
Chart =



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PLAY UPDATES - PUTS
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Cheesecake Factory - CAKE - cls: 39.30 chng: +0.28 stp: 40.75

As we would expect on another light volume post-holiday session,
shares of CAKE continued their recent consolidation, providing
little guidance as to near term direction.  The stock dipped
early in the day to test the bottom of the consolidation wedge
near $38.60 before rallying to the top of the wedge near $39.50.
After that volatile opening action, the stock drifted down,
finding consistent resistance at that upper wedge line.  CAKE
will eventually break from this pattern and we're still expecting
a breakdown, with the up phase in the daily oscillators already
looking tired.  Look for a break below $38.50 as the first sign
that the bearish trend is reasserting itself.  It will require a
break under the $37.50 support to get the downside momentum going
again.  Failed rebounds below $40 can still be used for opening
new positions, but our preference right now is to wait and make
CAKE prove itself to us before adding to current positions.
Conservative traders that don't want to take the risk to our
official stop may want to use a tighter stop at $40.05, just over
last week's intraday high.

Picked on May 13th at         $40.09
Change since picked:           -0.79
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =         639 K
Chart =



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

None


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The Option Investor Newsletter                  Tuesday 06-01-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Heavy Equipment, Defense and Internets
Spreads & Straddles: Strategy Selection: "Premium-Selling" With
    Upside Potential


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

Heavy Equipment, Defense and Internets

___________________________________________________________________

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.
___________________________________________________________________


Deer Co - DE - close: 66.73 change: +1.03

WHAT TO WATCH: Bulls may want to give DE another look.  The stock
is up six days in a row after bouncing from support at $62.00
last week.  Today's 1.56% gain breaks the trend of lower highs
with better than average volume.  A move back over $68.00 would
reverse the current P&F sell signal back into a buy signal.
However, DE has technical resistance near $69 with its 40 and 50-
dma's.

Chart=


---

Valero Energy - VLO - close: 68.63 change: +2.52

WHAT TO WATCH: No stranger to the watch list, VLO, an oil
refiner, surged to new all-time highs today as crude oil hit new
all time highs this morning.  The 3.8% gain produced a new MACD
buy signal and an ascending triple top breakout on its P&F chart.
We'd probably look to buy a dip back toward the $67 area but be
careful with your stop losses.  The stock is very long-term
overbought after breaking out over the $40 level last October.

Chart=


---

Engineered Support Systems - EASI - close: 54.64 change: +2.44

WHAT TO WATCH: This summer is likely to be full of violence in
Iraq, Saudi, Israel, Greece, and potentially here at home. That's
why it's not a bad idea to keep an eye on some of the defense
stocks.  Shares of EASI have been trading in a range between $45
and $55 for the last few months.  Yet now EASI looks poised to
breakout through the $55 level.  Consider a trigger at $55.50 and
target $62.00, the December highs.

Chart=


---

Priceline.com - PCLN - close: 28.22 change: +2.02

WHAT TO WATCH: Internet stocks were on fire today but we noticed
that PCLN's 7.7% gain was produced on heavy volume.  Average
volume for PCLN is only 858K shares yet today's rally was fueled
by more than 2 million shares.  The move produced a new bullish
triple-top breakout on its P&F chart with a $39 price target.  It
also happened to produce a breakout over April resistance near
$27.50. PCLN is very short-term overbought with the breakout over
$24 last week so aggressive traders need to be careful when
considering an entry.

Chart=




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

BOL $63.20 +2.18 - Today's 3.57% gain is a breakout over its
simple 50-dma.  The move comes on strong volume and produces a
new MACD buy signal.

EBAY $89.73 +0.93 - We're impressed that after last week's non-
stop rally that EBAY could turnaround from profit taking this
morning to mark a new closing high by the afternoon.

AMZN $50.23 +1.73 - Another Internet that's setting things on
fire is AMZN.  The stock is up seven days in a row and breaking
out over its 200-dma and the $50 mark today.

NDSN $39.20 +1.35 - Yet another breakout over major resistance on
big volume!

LFUS $41.55 +1.95 - Yet another big volume breakout over major
resistance!

JWN $40.98 +0.43 - We've mentioned JWN before. The high-end
retailer is trying valiantly to hit new highs.


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SPREADS & STRADDLES
*******************

Strategy Selection: "Premium-Selling" With Upside Potential
By Ray Cummins

One of the most popular methods for speculating on directional
issues with options is the synthetic position.

(Editor's Note: The staff writer who produces this section is
on extended leave for the Memorial Day holiday.)

Synthetic Positions: "Premium-Selling" With Upside Potential

The simplest way to explain synthetic positions in the financial
world is to say they are simply alternate ways of constructing
the equivalent risk-reward outlook with different instruments.
The term "synthetic" is an appropriate description because a unit
of the underlying issue is being synthesized and in practice,
futures traders often use various combinations of derivatives
to produce similar profit-loss characteristics with commodities,
while fund managers utilize many of the same techniques to reduce
the risk of adverse market movements in large equity portfolios.
Retail traders can also benefit from those strategies by creating
positions that mirror the activity of specific stocks and indexes.
With the purchase of a call and the sale of a put of the same
strike and duration, traders can capitalize on anticipated stock
movement without investing as much capital as they would when
buying the underlying issue on the open market.

Recall that when you buy stock, you are considered "long", as you
own it outright and will participate in any price appreciation of
the stock.  Using a synthetic position, you can create a similar
scenario but the leverage of options magnifies any gain in the
underlying issue, thus providing exponential returns on any upside
activity.  Although there is some added expense in the "premium"
(time value) for the long options, this cost can often be negated
through careful selection of favorably priced positions, such as
selling expensive puts and buying discounted calls.  At the same
time, the synthetic position generally requires a smaller capital
outlay than the purchase of underlying stock, thus the remaining
funds can be used to produce profits in other investments.

The advantages to this unique strategy are numerous but the major
incentive for this type of approach is that its payoff structure
is very similar to holding a long stock position and yet traders
are not required to take physical delivery of the issue to benefit
from its activity.  Second, the initial capital requirements for a
synthetic position are much lower than being long on the stock,
even when using maximum margin in its purchase.  Finally, since the
synthetic delivers the same performance as a long position in the
underlying issue, there is no additional risk in using derivatives
to duplicate the basic stock ownership strategy.  Of course, there
are some basic requirements for participating in this strategy, such
as having a margin account and the ability to sell cash-secured or
"naked" options.  Another aspect that traders should be aware of is
the ongoing collateral requirement for the sold (short) options due
to the possibility of assignment.  That expense must be factored
into the final analysis of the strategy when comparing it to other
techniques, such as buying the issue outright or using a specific
combination of stocks and options to produce a similar position.


Splitting The Strikes: A Speculative Approach!

For most traders, the ability to profit from a stock's movement at
a fraction of the cost of owning the issue is the primary reason
for utilizing options.  The bullish, limited-risk approach falls
into two primary categories: option buying and (covered) option
selling, and the most common method of option trading among retail
participants has always been the purchase of calls.  That technique
can be very profitable but it requires an initial capital outlay
and in the case of in- or at-the-money options, leaves the trader
exposed to a large amount of downside risk.  In addition, traders
who purchase options during a strong directional movement in the
underlying will be forced to pay higher premiums, greatly reducing
the probability of profit.  Those who realize the difficulties
associated with this approach are forced to remain on the sidelines
until they discover an alternative method for trading the trend
with options.

Fortunately, there are numerous combination strategies that can
help limit the overall cost of the trade and simultaneously benefit
from inflated premiums.  One of these techniques is a variation of
the synthetic position using out-of-the-money options to construct
a more speculative outlook play with lower probability of profit
and reduced risk. In this case, you buy an out-of-the-money call
to take advantage of any extreme or rapid upward movement in the
underlying issue, and you sell an out-of-the-money put to pay for
the call.  Purchasing an OTM call costs less, at the expense of
position Delta, but the drawback is offset by the sale of an OTM
put, which provides a greater margin of downside risk.  As with
any naked-put position, you must be willing to own the underlying
stock in the event of an unexpected downturn.  However, by using
OTM options, you will have a larger cushion to absorb additional
volatility in the issue.

At first glance, this strategy may appear far too speculative to
be viable for conservative traders but in truth, it works very
well with trending issues that have large upside potential and the
risk is little more than if you sold the identical cash-secured
put to collect premium on a bullish stock.  The primary advantage
of this technique is the cost of speculation is borne entirely by
portfolio collateral through the sale of put options.  For that
reason, the downside risk in the strategy is solely dependent on
the "short" component of the position, thus it is important to
understand completely the various outcomes and potential methods
of adjustment associated with writing "naked" puts.

Put Writing: The Concept of Selling Premium

There are two basic methods that traders use to profit from the
sale of "naked" puts.  The first technique involves writing "at
-the-money" options to take advantage of a bullish movement in
the underlying stock for large, short-term profits.  The less
aggressive approach involves writing "out-of-the-money" puts,
hoping that the sold position will expire worthless.  Either
technique can be used to take a position in a specific issue but
in most cases, the common approach to put writing is applied as
a "deep-out-of-the-money" strategy in which the trader uses the
collateral value of his portfolio to return a consistent, limited
profit for portfolio gains or to pay for a speculative call in a
synthetic position.

The basic strategy involves selling a put against funds or other
collateral held in your brokerage account.  The sole purpose of
the collateral is to assure that money is available to purchase
the stock should the put be assigned to the account.  Generally,
the buyer of the put will exercise the option if the underlying
stock drops below the sold strike price at expiration.  If the
share value remains above the sold strike price at expiration,
the put will expire worthless and the option premium retained by
the seller constitute a profit.

Put writing takes advantage of the concept of time decay; the
premium of an option decays at a predictable rate and it declines
very rapidly in the final month before the option expires.  Unlike
stock trading, where an investor can hold on to a stagnant issue
indefinitely hoping it will rebound, the value of an option will
shrink if the stock fails to move in the correct direction.  This
time-value erosion allows a trader to profit without having to
correctly predict the future movement of the underlying issue, as
long as it remains above the sold strike price.

Writing "naked" puts for monthly income usually involves selling
out-of-the-money options on a stock that the investor expects to
finish above the sold strike price.  With careful selection of the
underlying issue, most sold puts will expire worthless, allowing
the investor to keep the premium and receive a reasonable profit,
without ever having to buy the underlying stock.  There is still
the margin maintenance requirement, however this commitment of
collateral funds is almost always less than the outright purchase
of an equivalent number of shares.

An investor who is interested in buying a stock may also consider
selling a cash-secured put as alternate means of acquiring the
underlying issue.  Generally, when a person wants to buy a stock
at a specific price, he will use some type of “limit” order.  The
problem is, after the initial order is placed, the stock will not
be purchased until it trades at or below the limit price.  Instead
of waiting for that movement to occur, the investor could simply
write a cash-secured put.  A premium (the bid price of the option)
will be paid to his account for the obligation to buy the stock
and if the price of the issue is below the strike price of the
sold put at expiration, the stock will be assigned to his account.
Of course, the investor has predetermined that the resultant cost
basis (the sold option's strike price minus the option premium)
is an acceptable price at which to own the new stock, prior to
initiating the position.  Fund managers and institutional traders
also use this conservative strategy as it pays them for assuming
the obligation to buy a particular stock they intend to eventually
add to their portfolio.

Position Selection and Management

A sold (short) put requires the underlying issue to remain above
a specific price in order to generate profits.  As a trader, you
must be confident of this outcome before participating in this
strategy and in addition, you should know at what (underlying)
price the position will "break-even."  You should also determine
the price the underlying issue would have to reach to generate
unacceptable losses.  Ideally, you will enter a position and then
simply wait for expiration.  Unfortunately, it doesn't always work
that way.  To be successful on a consistent basis, option positions
must be closed (or adjusted) when the predetermined exit points are
reached.  You must be prepared to make these adjustments when they
are needed, not after the position has moved beyond a reasonable
loss level.  This type of money management requires meticulous
planning and the discipline to execute predetermined exit and
adjustment strategies in adverse conditions, regardless of your
emotions or instincts.

With this form of trading, there is a large downside potential and
in many cases, failure to close a position in a timely manner can
lead to catastrophic portfolio losses.  For years, we published a
classic "warning" paragraph in each week’s naked-put narrative for
that reason alone.  The last two sentences are key to success: "It
is important that you consider using trading stops on any 'naked'
option positions to help limit losses when the stock price drops.
Many professional traders suggest closing the position when the
stock price falls below the sold strike or using a 'buy-to-close'
stop at a price that is no more than twice the original premium
from the sold option."  It is not uncommon for traders who have
enjoyed a long string of winning positions to get "wiped out" by
one bad play because they failed to limit their losses when the
market moved against them.  The reason is the decision usually has
to be made under duress, at the worst possible moment.  The only
way to avoid this fate is to develop a plan with a target exit (or
adjustment) point, and stick to it.  This requirement is difficult
for new traders to adhere to but they soon learn why professionals
use proven money management techniques to maximize profits and
limit losses; they come out ahead in the long run.

Adjustment Strategies

The strategy of selling naked puts on bullish stocks is a fairly
conservative technique but occasionally, you will be faced with a
position that is in-the-money as the expiration date approaches.
One of the most common methods for preventing a potential loss in
this situation is the "roll-out" and it often is used when the
underlying issue falls to (or below) the strike price of the sold
option.  Remember, selling a put obligates the writer to purchase
the underlying issue at the sold strike price.  If the share value
remains above the sold strike, the writer retains the premium for
the sold option.  However, if the stock price falls, the writer
may need to "roll" down and/or forward in his position, to avoid
potential assignment of the stock.  He can repurchase puts that
were sold initially and sell new longer-term options.  Generally,
the new options are written at the next lower strike price, or in
greater quantity so as to generate a credit.  In this strategy,
no debits are incurred but a realized loss is taken in the short
term.  If the stock price continues to decline, the process is
repeated.  Eventually, the issue stock should stop falling and
the last set of written options will expire worthless.  At that
time, the trader's overall profit will consist of the sum of all
the previous credits.

There are two requirements for success in this popular "rescue"
technique.  The first prerequisite is the underlying stock must
eventually rebound and the second condition is the trader must
have enough portfolio equity (or collateral) to stay with the
strategy even if the issue declines significantly.  A large stock
portfolio is best for this type of trading because the collateral
required for naked option writing may be in the form of cash or
securities.  There are no margin interest charges and the existing
positions in the portfolio are unaffected unless there is a need
for additional funds to close the play prematurely.  This simple
exit strategy offers a high degree of (eventual) success although
in some cases, there may be an accumulation of losses before a
profit is achieved.

The great feature of options is they can be used in a number of
ingenious ways to create the most appropriate position for the
current market outlook and your personal risk-reward attitude.
The right combination of puts and calls can produce an effective
position with results that are similar to being long on the stock,
with less expense, and portfolio collateral can be used to finance
the entire transaction.  This approach also has the potential for
unlimited gain, thus providing an opportunity (one you don't have
with naked-puts alone) to overcome a number of losing plays.  As
with any speculative strategy, be sure to thoroughly explore the
various outcomes and potential risk, so you can comfortably employ
the technique to its fullest potential.

Good Luck!


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